Switzerland and the United Kingdom: joint efforts for a prosperous future

The United Kingdom’s exit from the EU has had a noticeable impact on cross-border economic relations in Europe. Not only British and EU companies, but also Swiss businesses were confronted with tricky issues. These included in particular additional costs (e.g. customs duties), regulatory uncertainties, administrative burdens and delivery delays. This in times of a global pandemic and economic crisis. At the same time, however, it remains to be seen whether these short-term turbulences will also be reflected in a weaker economic development of the United Kingdom in the medium and longer term.

In close exchange with the business community, Swiss government has succeeded in placing Switzerland’s bilateral relations with the United Kingdom on a new contractual basis in good time. At present, the focus must be on further deepening bilateral economic relations. On the one hand, an early conclusion of the negotiations on a comprehensive financial services agreement is of great importance. On the other hand, the trade agreement should be expanded rapidly. But there is also interesting potential for cooperation beyond classical trade policy. For example, in the area of research, digitalisation, sustainability, but also within the framework of international organisations.

On 31 December 2020, the United Kingdom (UK) completed Brexit and left the EU. After almost 50 years of EU membership, it is once again a European third country. As a result of Brexit, the EU has shrunk by around 67 million inhabitants and one sixth of its economic output. It has also lost its third-largest contributor.

Comparing the development of the gross domestic product (GDP) of the United Kingdom with other European states in the context of the coronavirus pandemic, it becomes clear that Brexit has dampened the economic recovery of the United Kingdom in the short and medium term. Experts from the non-partisan Office for Budget Responsibility of the British administration even estimate that economic development will be twice as badly affected by Brexit (-4 per cent GDP) as by the coronavirus pandemic (-2 per cent GDP).

Specifically, the United Kingdom recorded the sharpest GDP decline of all G7 countries in 2020, which also include Germany, France, Italy, Japan, Canada and the USA (-9.8 per cent compared to the previous year). Germany – with -4.6 percent – and the Eurozone – with -6.3 percent – recorded significantly smaller welfare losses (see chart). Moreover, according to analyses by the Bank of England, declining investment activity in the British private sector had already begun in 2019 as a result of Brexit uncertainties. In 2022, however, this negative trend is expected to reduce significantly. It will thus be interesting to see whether the British economy will be able to continue its strong catch-up movement in the second half of 2021.

The UK’s manufacturing industry in particular struggled with operational problems in the first months after Brexit. According to the UK’s Society of Motor Manufacturers and Traders (SMMT), for example, more than 60 per cent of its members needed significantly more time and resources to trade with mainland Europe than before Brexit. Specifically, it is not so much exports as primarily imports from the EU that have fallen sharply in the first half of 2021 when compared to the rest of the world (-27 vs. +39.7 per cent). However, the initially predicted collapse of the British automotive industry has so far failed to materialise. The food industry reported a 13.9 per cent year-on-year decline in exports to the EU for the first three quarters of 2021. But the services sector has also been hit: a study of the British financial industry reports that Brexit has led to 440 firms relocating to the EU. This was accompanied by the loss of 7,400 jobs and around 10 per cent of bank assets.

Future economic developments in the UK – and for individual industries – will depend on several factors. On the one hand, the course of the coronavirus pandemic and the development of global supply bottlenecks will be relevant. At the same time, however, it will also be decisive whether the UK succeeds in rapidly and substantially deepening relations with important economic partners after Brexit (e.g. the USA) and stabilising trade dynamics with the EU. Furthermore, economic policy decisions at home are also important in order to strengthen the competitiveness of British companies in the international environment. For example, the current British government is strongly promoting the production of electric vehicles.

Currently, UK trade and investment statistics only allow isolated conclusions about negative dynamics vis-à-vis current EU member states (EU-27) compared to other major trading partners (sources: ONS for goods and investment, WTO for services).

Looking at the development of British trade in goods before the Brexit decision (23 June 2016) until today, several aspects are striking. While the overall trade volume has increased, there are differences in developments with the EU-27 states and other partners. The effects of the uncertainties surrounding the introduction of extensive border controls in EU-UK trade are also clearly visible: a sharp increase in trade volume towards the end of 2020, followed by a massive slump in the first quarter of 2021 and a recovery in the middle of 2021. Various companies stocked up their inventories before Brexit during this period in order to avoid turbulence as a result of new border controls at the beginning of 2021. According to calculations by the Centre for European Reform, the UK’s trade in goods in 2021 was 11 to 16 per cent lower than if the country had remained in the EU’s single market.

In the case of services, a different development can also be seen among important trading partners: while trade with the USA grew by 10.1 per cent between 2015 and 2020, trade with the EU-27 countries shrank by 1.5 per cent. Cross-border trade in shares of EU companies, for example, has shifted significantly to the EU. The decline was also evident in transport and tourism – an indication that the coronavirus pandemic was also having a major impact.

On a day-to-day basis, Brexit has had a noticeable impact on the British Isles. Delivery delays as a result of the introduction of extensive customs controls and regulatory checks between the EU and the UK are worth mentioning. These transport problems were and are a major problem for the export of perishable foodstuffs from the UK (e.g. seafood).

In connection with Brexit, however, the staff shortage has also become more acute as a result of the abolition of the facilitated work permit for EU citizens on the island. Jobs without higher qualifications in the transport industry, gastronomy, manufacturing and food processing are particularly affected. The consequences are gaps in supermarket shelves (e.g. meat, milk), rising energy and goods prices and temporary fuel shortages at petrol stations.

It is important to note that not all of the problems mentioned were caused by Brexit alone. The impact of the coronavirus pandemic and the global shortage of various raw materials also play a significant role. And the skills shortage already existed in the UK before Brexit. Yet, leaving the EU has amplified many challenges.

The legal framework of EU-UK economic relations essentially corresponds to that of a modern free trade agreement (FTA). However, the EU-UK TCA is more comprehensive in certain areas than the FTA that the EU has concluded with Canada, for example (CETA). It also contains detailed provisions on ensuring equal and fair conditions of competition for all participants in a market (‘level playing field’). The EU-UK TCA contains extensive competition and state aid rules. At the same time, minimum rules were also laid down in the areas of environment, tax, labour and social law. The EU-UK TCA also contains a ban on weakening or reducing current protection standards. For the EU, these rules are also mandatory for the future design of its relations with other European third countries – unlike with Canada, for example. This is with reference to the countries’ geographical proximity and the intensity of the economic relations.

Nevertheless, the departure of the United Kingdom from the EU single market is accompanied by the loss of numerous advantages in bilateral economic relations. The following areas are worth mentioning:

• new border controls on EU-UK trade in goods and advance declarations required
• exclusion from the network of EU free trade agreements including possibilities of cumulation of origin
• harmonisation in the certification and marketing authorisation of industrial products
• loss of passporting rights for financial services
• additional requirements for the provision of personal services
• no mutual recognition of professional qualifications
• more difficult access to skilled workers.

Northern Ireland – the only part of the UK with a physical border with the EU – is a special case. Both sides have agreed to avoid hard internal border controls in view of the Northern Ireland conflict. Therefore, certain EU regulations remain applicable in Northern Ireland and the European Court of Justice also plays a role in case of disputes.

Brexit and the conclusion of the EU-UK TCA also put Switzerland under pressure to act in two respects: on the one hand, bilateral relations with the United Kingdom had to be placed on a completely new contractual basis within the shortest possible time as part of the ‘mind the gap’ strategy. This was because the bilateral treaties with the EU were no longer applicable to bilateral relations between Switzerland and the UK at the time of Brexit. On the other hand, with a view to the EU-UK TCA, it is necessary to address possible discrimination potentials of Switzerland vis-à-vis the EU in the relationship with the United Kingdom.

The United Kingdom is Switzerland’s third most important economic partner after the EU-27 countries as a trading bloc and the USA. Conversely, Switzerland is also an extremely important trading partner for the UK. Neither Brexit nor the coronavirus pandemic have changed anything about the UK’s relative importance for Switzerland. This manifests itself in a bilateral trade volume of over CHF 35 billion (goods and services, excluding gold, 2020).

Nevertheless, with regard to other important partners, it can be seen that goods trade has tended to develop negatively compared to 2015: in the first three quarters of 2021, trade in goods with the EU-27 countries was 24.6 per cent higher than in 2015, while trade with the USA and China was even 52.9 and 57.3 per cent higher, respectively. In contrast, Switzerland’s goods trade volume with the United Kingdom fell by 31.8 per cent in the same period. All important Swiss export sectors were affected. Here, too, the strong increase in the last quarter of 2020 and the sharp drop in the first quarter of 2021 are striking. This confirms that the slump was not only caused by the coronavirus pandemic, but also to a large extent by the uncertainties of Brexit.

For the subsequent quarters of 2021, the pharmaceutical, chemical and watch industries showed a slight recovery, while the mechanical and electrical engineering, metal and textile industries continued their downward trend again after a brief upturn in Q2. As the UK’s border control regime has not yet been fully ramped up, it cannot be ruled out that further negative effects on bilateral goods trade dynamics could become visible in 2022.

The United Kingdom also remains Switzerland’s third most important partner in services trade, behind the EU-27 states and the USA, and ahead of China. In contrast to goods, however, the development here is positive: a comparison of the first two quarters of 2015 and 2021 shows a significant increase in Switzerland’s trade in services with the United Kingdom (+21.1 per cent), whereas trade with the EU-27 countries increased much less (+2.2 per cent). The USA and China recorded an increase of 7.3 per cent and 16.7 per cent respectively in the same period.

For the years 2020 and 2021, the influence of the coronavirus pandemic, combined with drastic restrictions in the cross-border movement of persons, is likely to have had a much stronger impact than Brexit: the pandemic has led to a drastic decrease in cross-border mobility – with or without the free movement of persons. Only when the epidemiological situation returns to normal will it be possible to make a more meaningful statement about the effects of the loss of the free movement of persons in relation with the UK.

The economic importance of the United Kingdom for Switzerland is also reflected in direct investment: with a capital stock of CHF 89.4 billion, the UK was the third most important target market for Swiss foreign direct investment in 2020, behind the EU-27 states and the USA. British direct investments in Switzerland amounted to CHF 62 billion in the same year.

The bilateral investment dynamics (capital stocks) from 2015 to 2020 with the United Kingdom clearly exceeded those with the EU-27 countries: investments from Switzerland to the UK (+93.2 per cent) almost tripled in relation to those to the EU-27 countries (+32.6 per cent), and the increase on the USA was even greater (+42.5 per cent). British investment stocks in Switzerland rose by 49.7 per cent in the same period. By comparison, investments from the EU-27 countries grew by 23.6 per cent over the same period, and those from the USA by 64.2 per cent. However, British investments in Switzerland have been declining again since 2018.

The ‘mind the gap’ fallback solution between Switzerland and the United Kingdom comprises nine agreements that have been in force (partly on a provisional or temporary basis) since 1 January 2021. They concern trade, mobility of service providers, insurance, aviation, road transport, acquired rights of citizens, coordination of social security, police cooperation and customs procedures. In addition, the United Kingdom assures Switzerland that it will unilaterally guarantee all existing EU equivalence recognition in the financial services sector vis-à-vis Switzerland even after Brexit. This also includes Swiss stock exchange regulations, which the EU did no longer recognise as equivalent from 2019.

The Swiss business community was closely involved in the implementation of the ‘mind the gap’ strategy by the Federal Administration. In essence, these agreements and unilateral measures secure the status quo of CH-UK relations as far as possible. The existing gaps are also due to the fact that the United Kingdom is seeking greater regulatory autonomy vis-à-vis the EU through Brexit.

Compared to the situation before Brexit, Switzerland was unable to secure the status quo with the United Kingdom in the following four areas in particular:

• facilitation of entry and residence, but no continuation of the free movement of persons
• mutual recognition agreements (MRAs) in conformity assessments of industrial products for only three categories instead of the previous 20: vehicles, Good Laboratory Practice (GLP) and Good Manufacturing Practice (GMP)
• limited possibilities for cumulation in CH-UK trade with input materials from certain countries as a result of the UK’s withdrawal from the PEM Convention.
• additional border controls on trade in goods as a result of the UK’s withdrawal from the CH-EU Common Veterinary Area and the European Customs Facilitation and Security Agreement.

The negotiations of the United Kingdom with the EU and Switzerland led in part to different results due to different interests. The parallelism of CH-UK and EU-UK negotiations as well as interdependencies in terms of content also played a role here. For Switzerland, the TCA EU-UK is particularly relevant in areas where the UK and the EU negotiated more far-reaching concessions than the UK and Switzerland.

The overall comparison shows that the bilateral treaty solution between Switzerland and the United Kingdom should be improved in some points in the medium term, despite its good substance. On the one hand, it is important to avoid discrimination vis-à-vis the EU (e.g. public procurement, provision of services or digital trade). On the other hand, however, there are also opportunities to go beyond the existing contractual agreements in the bilateral relationship and thus tap previously unused potential. These fields of action are to be addressed in the context of the planned deepening of the CH-UK trade agreement (see chapter ‘Lifting the bilateral trade agreement into the 21st century’).

As already mentioned, the exit of the United Kingdom from the EU confronted both the British and the Swiss economy with a multitude of challenges. Now the focus must be on further deepening bilateral economic relations. Concrete steps in this direction have already been taken.

Switzerland and the United Kingdom are among the strongest financial centres and largest exporters of financial services in the world (see next chart). In view of these strengths and the fact that there are still considerable gaps in the bilateral treaty basis in this sector in particular, the financial and insurance industries of both countries have been campaigning for a comprehensive agreement for some time. The key points and priorities in this regard have been developed by economiesuisse and TheCityUK in a comprehensive position paper.

The principle of unilateral equivalence recognition of financial services, as applied by the EU so far, is not sufficient for Switzerland and the UK. This is due to the comparable approaches to financial market regulation and similar general supervisory regulations. Instead, mutual market access should be expanded – especially for banking and investment services, asset management, insurance and financial market infrastructure. The key principle should be mutual recognition of the relevant national regulatory requirements to the greatest possible extent. Moreover, from the point of view of the economy, this should be done on the basis of comparable results of regulation instead of identical regulations. Equally central is a deeper regulatory cooperation between the supervisory authorities of both countries. In addition, topics such as data and cyber security should be covered and stronger cooperation with a view to global regulatory standards and future liberalisation in the financial sector should be sought. Separate agreements may be necessary for this.

At the political level, finance ministers Ueli Maurer and Rishi Sunak underlined their intention to deepen financial relations in a joint declaration on 30 June 2020. Since the beginning of 2021, intensive negotiations have been underway with the close involvement of the relevant industrial sectors from both countries. The task is complex, and there are no precedents. However, important fundamental questions have already been clarified in recent months. At a meeting on 8 December 2021, the two finance ministers expressed the expectation that the negotiations would be concluded by the end of 2022. Now it is a matter of fleshing out the sector-specific market access aspects and the regulatory areas concerned. In parallel, the assessments of the supervisory authorities for the identified regulatory areas, which are to be recognised as equivalent, will be initiated. For the business community, it is important that the negotiation dynamics, the level of ambition in terms of content and timeframe, as well as the close involvement of all relevant sectors, are maintained until the end.

If this succeeds, Switzerland and the United Kingdom would present the world’s most comprehensive market access agreement in the financial sector between two countries. Together with a speedy ratification in domestic politics, this would also be a strong signal against international fragmentation and market foreclosure.

The trade agreement between Switzerland and the United Kingdom primarily safeguards what has been achieved so far, therefore requires comprehensive consolidation. Talks on this have now begun at the political level. The Swiss business community sees the following areas for action in this regard:

The listed areas can also be addressed in separate agreements.

Switzerland and the United Kingdom are among the most innovative economies, have the strongest financial and research centres in Europe and are also leaders in the manufacturing industry in many sectors. It is therefore obvious that for the two states there is also interesting potential for cooperation beyond classical trade policy.

Increased bilateral cooperation between British and Swiss universities and research institutions should be mentioned here, as well as a number of future topics in the financial sector (e.g. fintech, sustainable finance) and digitalisation (e.g. artificial intelligence, blockchain). Both countries are also able to provide valuable impetus to the global development of technical standards. Within the framework of their activities in international organisations (e.g. WTO, OECD), there is also the opportunity to better assert common concerns through stronger coordination of their activities. This can involve trade, climate and sustainability issues, but also other economic policy topics of European or global significance.

Finally, another special feature of bilateral CH-UK relations is the fact that, since the Brexit decision in 2016, not only have exchanges at governmental and administrative level deepened significantly but there have also been numerous contacts and discussions between the economic actors of both countries at various levels since then. This intensity is also extraordinary in comparison to other economic partners of Switzerland and has sustainably strengthened mutual understanding and trust.

Brexit has had major trade, administrative and regulatory implications for all countries in Europe. However, the reshaping of bilateral relations with the United Kingdom also opens up new opportunities for Switzerland.

Switzerland and the United Kingdom are ideal economic partners in many areas. This is supported not least by their international competitiveness, strong innovative capacity, openness, political independence, sense of pragmatism, geographical proximity and the close contacts that already exist at government, administrative and business level. On this basis, bilateral relations can be profitably deepened for both sides.

The UK’s exit from the EU has not so much changed the numerical significance of the CH-UK bilateral relationship as expanded the scope of what is politically feasible. Even though the EU will remain Switzerland’s most important economic partner in Europe, Brexit has created numerous new opportunities that must be exploited.

If this succeeds, it will have positive effects on the competitiveness of both countries and the dynamics of bilateral trade and investment. It is also an opportunity for Switzerland and the United Kingdom to position themselves more strongly on important issues of European and global significance.