The Swiss option

The Swiss option: ‘Pick and choose’ – the Swiss option of bilateral agreements would provide greater flexibility but reduce market access and British influence

Another option for the UK would be to continue its economic relationship with the EU through a framework of bilateral agreements in a way similar to Switzerland. After the Swiss public narrowly rejected the EEA Agreement in a referendum, Switzerland decided to negotiate bilateral trade agreements with the EU building on their 1972 free trade agreement.

After six years of negotiation Switzerland was able to conclude a package of seven bilateral agreements in 1999, usually referred to as ‘Bilaterals I’, which are mainly liberalisation and market opening agreements and covered free movement of persons, technical trade barriers, public procurement, agriculture and air & land transport.   This was complemented with a further nine agreements in ‘Bilaterals II’ in 2004, which strengthened co-operation in the economic sphere and extended cooperation, including Schengen, taxation of savings, environment, pensions and measures to combat fraud. In total there are now over 120 agreements in force between Switzerland and the EU.

Advocates argue that the Swiss model would enable the UK to pick and choose the pros without the costs, in particular being free from the regulations emanating from Brussels. Swiss exporters must still meet EU standards when selling to the EU, but they are not obliged to apply these standards to the domestic economy or to non-EU exports. They are also free to negotiate their own free trade agreements and do not contribute to the EU budget.

The Swiss agreements exclude the Common Agricultural Policy and, more importantly, services, where the parties have not been able to reach an agreement beyond parts of the insurance industry, despite evidence of a positive impact for both Switzerland and the EU.[20]

The Swiss model seems at first an attractive way to sign agreements on areas of national interest while exempting areas where it is important to keep control at national level. However, the time it would take for the UK to renegotiate an agreement similar to the Swiss would mean a significant period of dislocation as negotiation takes place. Moreover, looking at Switzerland, there is no guarantee that the UK would achieve agreements on all its prioritised areas while keeping other challenging elements out, as there are two parties to the agreement. The UK would be likely to end up having to accept a balanced package of rules related to the Single Market in order to get market access. It is also an illusion that the Swiss option would enable the UK to choose freely when to update the agreement. Although bilateral agreements are static, and the UK would have the power to ‘say no’ to new regulations, it would be in the UK’s national interest to continue updating UK rules reflecting changes in EU law in areas covered by the agreement to ensure that businesses retained market access. This would then be done without the UK having any say in the policymaking process of these rules.

British companies would enjoy access to the Single Market, but only in limited areas where it could sign bilateral agreements and was prepared to follow EU rules

While capital flows between Switzerland and the EU are fully open, Swiss companies only enjoy tariff and duty free access to the EU’s Single Market – and right of establishment within it - in those areas covered by the bilateral agreements. Direct savings have been made both through reduction in trade barriers and, more importantly, through simplification of rules on testing and admission of products for the entire European market which is carried out by a single certification body.[21] Swiss merchandise exports to the EU are concentrated on a few sectors, particularly chemicals and medicinal products, machinery, instruments and watches.[22]

However, this option would only provide British businesses with access to those parts of the Single Market covered by the content of the agreement. In the Swiss case, the areas covered by bilateral agreements fell short of Swiss ambitions for access and were  limited to those suggested by the Council rather than those pushed for by the Swiss.[23] Were the UK to struggle to get an agreement on services, a substantial part of its economy would be left outside the Single Market with companies in these sectors having to pay the price of leaving the EU. This would be particularly true for financial services.[24] Moreover, the UK would have to apply EU rules as agreed in the bilateral agreement and although, much of the regulatory implementation is ‘voluntary’, the UK would have to continually update UK law to fit with changing EU regulations to retain market access for its companies. The alternative would be to maintain two regulatory regimes, one for domestic products and another for those being exported to the EU, which would be extremely undesirable from a business perspective. It is simply not true to state that the Swiss are ‘spared the regulatory burden of Brussels’ while retaining full access to the Single Market as many argue.

By signing agreements that cannot be amended substantially without renegotiation, Switzerland has retained formal control over which EU rules they chose to be incorporated into Swiss law. However, for Swiss businesses to be allowed to continue to export, they need to follow the rules of the EU. This is only guaranteed as long as the EU rules remain the same as when the agreement was made; if the EU’s laws are changed, Swiss businesses lose access unless Switzerland adjusts its rules accordingly. Switzerland therefore opts to ‘autonomously introduce’ similar measures to the EU to make sure its industry doesn’t have obstacles in accessing the EU market.[25] According to the European Commission, “the on-going implementation of these agreements obliges Switzerland to take over relevant Community legislation in the covered sectors”.[26] Although there is some flexibility in how these pieces of legsilation are implemented, moves towards the further harmonisation of rules between EU member states has meant it is becoming increasingly difficult for Switzerland to secure exemptions to implemenation.[27]

As with Norway, the Swiss option would enable an independent UK trade agenda, but its limitations and the risk of dislocation make the flexibility less attractive for British business

Switzerland is able to freely negotiate trade agreements with other countries by choosing not to take part in the EU’s common trade policy. It has chosen to make many of its FTAs through EFTA, both because it gives them a stronger hand in negotiations and also because it can rely on the trade negotiation competence in the EFTA Secretariat. It has also individually signed FTAs with Japan and China. However, as stated in the previous section on the ‘WTO option’, signing FTAs is not only about numbers – it is about quality, including how many areas are covered and how deep the agreement is. The quality of a deal depends on the balance of power between the parties. In the Swiss case, a KPMG study of the agreement stated that it appears that more market access opportunities have been granted for Chinese products being imported into Switzerland than vice versa. Looking at the structure of the tariff reduction schedule, nearly all of China’s major exports to Switzerland – textiles, light consumer goods, and equipment – will immediately enjoy benefits when the FTA becomes effective.[28]

As with the EEA option, the UK could sign FTAs with other countries in the world. This is a more flexible solution compared to negotiating with 28 EU member states. However, as the Swiss–Chinese FTA illustrates, being able to sign trade agreements doesn’t mean that the final result would necessarily be in the UK’s interests. Compared to the EU, the UK is a much smaller market and might not offer enough opportunities for other countries to see the value of signing an FTA on the UK’s terms.

Switzerland has to accept free movement of people but is allowed to introduce quotas on EU migrants

Like Norway, Switzerland had to accept free movement of people to gain access to the Single Market. According to the Swiss government, the biggest economic impact of the bilateral agreements results from the liberalisation of the movement of persons, making it easier to transfer Swiss staff to positions in the EU states and also to recruit workers for the Swiss labour market.[29]

Switzerland has some autonomous control over its borders and immigration through the safeguards clause which it obtained in the negotiations. The clause gives it the right to cap immigration over a limited period of time if the number of EU arrivals in a given year exceeds the average for the three preceding years by at least 10%.

This has recently been used by Switzerland to introduce quotas on certain residence permits, initially only for eight EU member states including Poland and Hungary, but in May 2013 extended to 17 countries including Germany and the UK. However, the EU argues that Switzerland is breaking the rules on free movement of people because they discriminate between groups of countries within the EU, and it has indicated that there might be restrictions on market access if the quotas continue. The Swiss business lobby Economiesuisse urged the Swiss government to prevent the quotas doing further damage to Switzerland’s difficult relations with the EU and warned that this could hurt the country’s businesses as many employers have a shortage of skilled employees and may face hiring problems.[30]

For the UK, adopting arrangements similar to Switzerland’s would mean a continuation of free movement of people. While this would be a positive for British business, it would not be a positive for those who want to leave the EU to reduce immigration. The Swiss example is a good illustration of the difficulty of cherry picking in the EU. Switzerland initially did not want the free movement of people; in fact, it was a key reason for the Swiss rejection of the EEA Agreement. Yet, Switzerland still had to accept this when they negotiated the first package of bilateral agreements because the EU saw this as essential for the operation of a Single Market.

The UK may well be able to get an agreement on quotas in line with the Swiss situation although the need for quotas for Switzerland is arguably higher than for the UK because the level of immigration relative to its population is far higher than the UK’s.

The UK would pay substantially less to the EU’s budget, but would equally lose access to funding programmes unless it chose to make the required contribution

Switzerland does not contribute to the EU budget, but does take part in the EU’s Research Framework Programmes. Participation in this is optional and dependent on contributions. The participation is legally based in the 1999 Research Agreement, but Switzerland has to negotiate the contributions it has to make for each new programme to enjoy full participation. Switzerland's contribution to the seventh framework programme is approximately €220 million per year over the seven year period.[31] According to the government, in the sixth programme Switzerland achieved a return on its financial contributions of more than 100% in the form of project support for researchers in Switzerland.[32]

An evaluation report from 2009 argued that participation was positive because the collaborative international approach is essential for numerous cutting-edge research fields. In particular, integration into international research networks provides access to specialist expertise abroad and a better knowledge of the competitive environment.[33]

Participation in this is optional and dependent on contributions. The UK could choose to remain outside and fund research nationally, or it could pay to be part of the programmes if it deemed them worth the costs.

The UK would have even less influence over European rules in the ‘Swiss option’ than were it to join the EEA, making the UK almost as much a standards taker as if it opted for the WTO option

Switzerland has to follow all the rules on the areas covered by the bilateral agreements, without being able to set the agenda and influence the development of those rules. Like Norway, Switzerland has no formal say in EU decision-making. Moreover, as a general rule, Swiss experts are not even allowed to sit on EU expert groups. Lack of information on, and notification of, new EU legislative proposals that involve even the fields covered in the bilateral agreements limit the possibility of the Swiss participating in the decision-shaping process.[34] As with Norway, the result of the Swiss not being involved in the practical aspects of EU decision-making is that certain developments go unseen by the national administration.

For the UK, the Swiss option would be even worse than the EEA option, as the latter at least provides some opportunity to input while policies are being drafted.  As stated in the previous section on Norway, it is not in the UK’s national interest to reduce itself to a standards taker.

The Swiss bilaterals involve complex – and time-consuming – negotiations with the EU, which the union is not keen to replicate

The Swiss relationship with the EU is not a formal model that lends itself to being readily replicated and there are several practical challenges with the UK opting for a ‘Swiss solution’. 

Negotiating trade agreements is a complex and time-consuming process, meaning costs to businesses due to uncertainty. Bilateral I took more than six years to negotiate, from proposing negotiations in 1993 to concluding in 1999, and it did not enter into force until June 2002, meaning that Swiss businesses were without the level of access they desired for nearly a decade after negotiations began. Were the UK to leave the EU and opt for a Swiss option, a substantial period of dislocation is therefore likely.

The process and administrative system surrounding the management of the agreements is viewed as burdensome, with 27 Joint Committees in total. In some cases it has proven to be a challenge to determine under which committee a certain sectoral agreement falls, causing delays that could be costly for businesses, such as the case of mutual recognition of driving licences, or customs formalities in relation to provision of services, or standards for wooden containers.[35]

The lack of any formal dispute resolution mechanism with sanctioning powers – with the exemption of the area of air transport, where the Commission and ECJ has been given competition powers over Switzerland - means that it is difficult for businesses to get clarification in case of disagreement.[36] There is no official institution to interpret the sectoral bilateral agreements in a universal manner. This creates legal uncertainty and poses a potential barrier to trade.

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Switzerland has to follow all the rules on the areas covered by the bilateral agreements, without being able to influence their design.

Accesibility Info

Finally, sustainability of the Swiss option has been questioned, as it is not a model favoured by the European Commission or by EU member states. The pressure for change from the Commission focuses on getting a better overall framework for the large number of agreements. Switzerland and the EU are currently discussing changing the relationship by adopting a more comprehensive and coordinated approach encompassing all current bilateral issues between Switzerland and the EU. This could include a type of surveillance mechanism and a dispute settlement mechanism, similar to the EEA institutions that govern the Norwegian EU relationship. Given the direction of travel of the EU–Swiss relationship, it is unlikely that the UK could achieve a relationship on the same basis, even if it were desirable.


References

[20] Henk Kox & Arjan Lejour, ‘Liberalisation of the European services market and its impact on Switzerland - Assessing the potential impacts of following the EU's 2004 Services Directive, 2005

[21] Swiss Directorate for European Affairs, Economic importance, 6 May 2013

[22] Economisuisse, ‘40th Anniversary of the free trade agreement between Switzerland and the EU’, 2004

[23] Pascal Sciarini, Cédric Dupont and Omar Serrano, Which future for Switzerland's bilateral strategy towards the European Union? A qualitative comparative analysis of agenda-setting, The Graduate Institute of Geneva, Centre for Trade and Economic Integration, Working Papers, 2010

[24] Clive Church, Dr Paolo Dardanelli and Sean Mueller, Implications for the UK Financial Sector of a ‘Swiss Model’ of relations with the European Union, Centre for Swiss Politics, University of Kent, January 2013

[25] Marius Vahl & Nina Grolimund, Integration without membership. Switzerland’s bilateral agreements with the European Union, 2006

[26] European Commission, ‘Trade Issues: Switzerland’, 2009, available at

[27] Economiesuisse, Switzerland and the EU: bilateralism in mutual interest, 2010

[28] KPMG, ‘Is the China – Switzerland Free Trade Agreement for you?’, 2013

[29] Swiss Directorate for European Affairs, Economic importance, 06 May 2013

[30] European Voice, Switzerland seeks to limit number of EU workers, 27 March 2013; and Manon Malhere, Free movement of persons: Swiss victims of own success, Europolitics special issue on Switzerland, 20 April 2012 

[31] European Commission, METRIS - Monitoring European Trends in Social Sciences and Humanities – Switzerland Funding system European and international funding, 10 October 2013.

[32] Switzerland Department of Economic Affairs website, ‘Research’, available at

[33] Swiss Confederation, Federal Department of Home Affairs and State Secretariat for Education and Research, Effects of Swiss participation in EU Research Framework Programmes Interim report, 2009, 2010

[34] Marius Vahl & Nina Grolimund, Integration without membership. Switzerland’s bilateral agreements with the European Union, 2006

[35] Christa Tobler, Jeroen Hardenbol & Balázs Mellár, ‘Internal Market beyond the EU: EEA and Switzerland’, 2010

[36] Marius Vahl & Nina Grolimund, Integration without membership. Switzerland’s bilateral agreements with the European Union, 2006