Protectionism: SMEs barely notice trade barriers

"We do not expect a recession. Despite warning signs." 

The trade war is making companies nervous. Nevertheless, protectionism is not to blame for the economic slowdown, says Oliver Adler. In an interview, the Chief Economist of Credit Suisse Switzerland assesses the chances of a recession and talks about the impact of trade barriers on SMEs.

How have exports from Switzerland developed over the last ten years? Where do we stand today? 

Oliver Adler: Export volumes grew steadily after the financial crisis, until the euro crisis in 2011. But Switzerland was barely affected by this because Germany in particular, Switzerland's most important export market, continued to deliver good economic growth. The big shock came in 2015 with the abandonment of the minimum euro exchange rate. Swiss companies suffered from this for around a year, but were able to maintain their trading volumes by offering price discounts. A very strong phase followed, between 2017 and autumn 2018. Exports began to weaken at the end of last year.

Is this down to the trade war between the US and China?

First and foremost, it's an economic problem. There was strong economic stimulus in the US in 2018 thanks to tax cuts. Today, it's a very different story. At the same time, Europe is experiencing a weakness in industry, particularly in the automobile sector. This is partly due to reduced demand from China. Swiss industry is also feeling the effects of this development. This is apparent if you look at indicators such as the Purchasing Managers Index (PMI). This is currently very weak.

pmi switzerland august 2019

Significant decline in the PMI for industry

Growth threshold = 50

Source:, Credit Suisse

Is a recession on the cards?

We do not expect a recession. Both the inverse yield curve and the fact that PMIs are down globally are warning signs. But the downturn mainly affects the manufacturing sector. The service sector, which is larger, continues to perform better in most countries. Labor markets are also strong, so private consumption should be able to keep the economy afloat. In addition, the central banks will support the economy by introducing additional easing measures. 

You say that the trade war is not the main cause of the economic downturn. In that case, why are so many people so alarmed?

For China and countries that are integrated into the supply chains, it really is very important economically. The main effect is psychological. The trade war is making people nervous, which makes companies very reluctant to invest.

The trade war is a struggle between China, the emerging world power, and the US, the current world power.

Oliver Adler, Chief Economist, Credit Suisse Switzerland: 

Protectionism has increased globally since 2009. This is shown by the latest Credit Suisse SME study. What are the reasons behind it?

In economically difficult times – like after the financial crisis, for example – there is a general rise in calls to protect the domestic economy, especially for structurally weak areas. And in the US these are, of course, the areas which are under particularly strong pressure from Chinese competition. This includes the steel industry. This trend had already begun under Obama, but fewer tariffs were imposed at that time. However, the current conflict between the US and China isn't just about trade. It is a struggle between the emerging world power China and the US, the current world power. By the way, Switzerland is no stranger to protectionism. Agriculture in particular is very strongly protected against foreign competition.

global protectionism since 2009

Concealed protectionism through subsidies 

Number of trade-liberalizing and trade-distorting state interventions worldwide, by typology of intervention, from 2009 to May 2019

Source: Global Trade Alert (as of May 2019), Credit Suisse

Despite this increase in protectionism, only 29% of the companies surveyed in the SME study said that trade barriers were currently a major challenge. And only 23% said that the situation had deteriorated compared with five years ago. Where does this positive assessment come from?

On the one hand, the trade dispute primarily affects China, the US, and heavy industry in general. Switzerland has little of this type of industry and certainly not in the SME sector. On the other hand, export SMEs are usually well established and integrated in their markets, so they scarcely notice the new protectionism. Market access remains very good, especially in the main European market. Companies tend to be more aware of increasing protectionism if they enter into a new market. This can be seen from the example of China, where companies see more barriers to trade. The SME study also shows that regulatory guidelines (e.g. proof of origin or consumer protection) have a greater inhibiting effect on SMEs than customs duties. However, these have not increased sharply in their main markets.

The strong Swiss franc and the high price level are perceived as hurdles. What do you advise?

Currency risks can be hedged. Many companies are already doing it. Another possible approach is so-called "natural" hedging. Export companies can reduce their currency risk by buying manufacturing parts abroad. The third and most extreme approach is to outsource production abroad. But producing quality goods that are not very price-sensitive is also very effective. A prime example of this is the pharmaceutical industry.

One potential risk is Trump's threat to impose duties on the German car industry.

Oliver Adler, Chief Economist, Credit Suisse Switzerland: 

How is protectionism and thus the export situation for Swiss SMEs likely to develop in the future?

Some people think that we're coming to the end of globalization. I think that's an exaggeration. Consumers continue to demand low-cost imported goods. And companies will continue to site their production facilities in favorable locations. They will bypass trade barriers. It's interesting, for example, that many Chinese companies are relocating their production facilities to other countries – Vietnam, for example – in response to US customs duties. The US imports are now simply coming from other countries. For me this is an indication that we will not see a collapse in world trade. One potential risk, however, is Trump's threat to impose duties on the German car industry. That would also have an adverse impact on Swiss suppliers.

How good are trade relations between Switzerland and the US otherwise?

The USA is an important market for the Swiss economy, including its SMEs. However, the SME study shows that they perceive the US market as more difficult than the European one. This is due more to the recognition of standards, for example, than to customs duties. A free trade agreement with the US would be some help in this respect. Since President Maurer's visit to Washington, there has apparently been certain progress in the negotiations, but agriculture remains the sticking point. 

It would be a problem for businesses if no framework agreement were concluded.

Oliver Adler, Chief Economist, Credit Suisse Switzerland: 

China has an above-average number of trade barriers. To what extent could the "One Belt, One Road" initiative simplify exports to China?

The main aspect of this initiative is to improve logistics, not least by making rail links more efficient, which would reduce transport costs. However, these are not a key factor for high-quality Swiss export goods such as watches or medicines. The key issues – particularly for Swiss SMEs – are problems with official bodies, majority control issues in the case of investments, and the protection of intellectual property. Here China must introduce reforms in its own country. Gradually they are doing it because local entrepreneurs are also demanding it. "One Belt, One Road" will also increase the pressure for reform, because other countries are also involved in the financing.

By contrast, our trade relations with Europe are very good. How important is the framework agreement with the EU in this context?

It would be a problem for businesses if no framework agreement were concluded, especially if the bilateral agreements were terminated as a result. Non-tariff barriers to trade would then increase sharply. For example, companies would have to apply for accreditation in each country individually. Exporting would become a much more laborious business. From the point of view of SMEs, the framework agreement preserves the status quo. Their products already have to comply with EU guidelines if they want to export. The framework agreement simply states that Switzerland will automatically adapt them if they are changed in the EU internal market.

sme survey on framework agreement CH EU

Slim majority of SMEs supports institutional agreement with EU 

Percentage of responses to the question: "Do you support the current draft framework agreement between Switzerland and the EU?"

Source: Credit Suisse 2019 SME survey

In view of the weaker economic cycle, what are the prospects for Swiss SMEs?

They would suffer, of course, in the event of stagnation or recession. SMEs react sensitively to the global economic cycle. At the same time, however, the SME landscape is very diverse. The prospects for the future also vary sharply from sector to sector. Basically, we will have to learn to live with slower global growth. The mini boom of 2017 and 2018 is behind us, but there will continue to be many opportunities for well-positioned SMEs in the future.