Swiss Issues Sectors Swiss Foreign Trade – Facts and Trends...Switzerland's export goods cheaper...

Economic Research

Swiss Issues Sectors Swiss Foreign Trade – Facts and Trends March 2009

Economic Research

Swiss Issues Sectors

Publishing Details

Published by Credit Suisse Economic Research Uetlibergstrasse 231, CH-8070 Zurich

Contact Details [email protected] Tel. +41 (0)44 334 74 19

Authors Dennis Brandes Nicole Brändle Claude Maurer Nora Sydow Claude Vautier

Cover Image ImagePoint.biz/Jens Kling

Print Deadline March 2009

Visit our website at www.credit-suisse.com/research (Swiss Economy/Sectors)

Disclaimer

This document was prepared by Credit Suisse Economic Research, and does not constitute the results of any financial analysis. Consequently the "Guidelines to Guarantee the Independence of Financial Analysis" issued by the Swiss Bankers Association do not apply to this document. This publication is for information purposes only. The views expressed herein are those of Credit Suisse Economic Research at the time of publication (and are subject to change). This publication may be reproduced, provided the source is quoted. Copyright © 2009 Credit Suisse Group and/or its affiliated companies. All rights reserved.

Economic Research

Swiss Issues Sectors 3

Editorial 4

1 Where to? Trading Partners 5 1.1 Diversification of Swiss Exports 5 1.2 An Overview of Switzerland's Trade Policy 7

2 Who? Sectors, Businesses and Regions 9 2.1 Sectors 9 2.2 Companies 11 2.3 Regions 12

3 What? Competitive Advantages and Quality Aspects 11

3.1 Comparative Advantage at an International Level 11

3.2 Quality Aspects – Export Unit Value 11 3.3 Is Switzerland a "Bazaar Economy"? 11

4 Outlook 11 4.1 Determinants of Swiss Exports 11 4.2 Export Barometer 11 4.3 Current Outlook for the Swiss Economy 11

5 Conclusions 11

Contents

Economic Research


Editorial

"In Switzerland, every second franc is earned abroad" – this sentence has become little more than a cliché trotted out by journalists, politicians and economists alike to illustrate the importance of the rest of the world to the Swiss economy. However, the facts and trends that underlie this statement are less well known. Why is it worthwhile to take a comprehensive look at Switzerland's foreign trade activities? Two reasons stand out. First, Switzerland's economy is integrated into the global economy to an extremely high degree. This is apparent not only from so-called "globalization indices," in which Switzerland is regularly near or at the top. It is also a fact that Switzerland demonstrates impressive dynamism as regards goods, capital and labor – crucial factors in relation to foreign trade. In 2008, Switzerland exported goods to the value of approximately CHF 207 billion.1 This corresponds to more than 40% of Switzerland's gross domestic product (GDP). In 1990, it was only around 20% of GDP. Average real capital exports2 grew almost tenfold between 1990 and 2007. In comparison, real GDP grew by a factor of only 1.3 over the same period. In 2007, in addition to 3.2 million employees at home, Swiss companies provided approximately 2.4 million jobs abroad. This figure has also risen substantially over the past 20 years.3 Second, foreign trade is an important growth driver for the Swiss economy. In the domestic market, the growth prospects for many sectors are limited; the markets are more or less saturated. Beyond Switzerland's borders, however, there are significant opportunities for growth. The importance of foreign trade is also apparent from the national accounts. Foreign trade contributed a total of 0.48 percentage points to the average GDP growth of 1.5% between 1990 and 2008. The contribution made by exports amounted to a substantial 1.94 percentage points (imports: -1.46). The aim of this study is to uncover the driving forces behind the export success of Swiss companies. In doing so, we intend to examine the following aspects: Where does Switzerland export to, and where is demand for our exports growing most strongly? Who, i.e. which sectors, businesses and regions of Switzerland, are especially active in foreign trade? What is exported? Is it possible, for example, to make any statements about the competitive position of Swiss exporters or the quality of the exported products? Besides these persistent structural factors, which will be examined in the first section of the publication, this study also aims to highlight the current trends and outlook for Swiss foreign trade. The second part of the study therefore initially analyzes the major determinants of Switzerland's exports. Building on these findings, we will then move on to present the Economic Research export barometer which, as a leading indicator for Swiss exports, takes the pulse of the economy in a crucial area. The export barometer forms the basis for our current economic forecasts for 2009, which are presented in the closing chapter. In conclusion, we venture a look beyond the end of the year and attempt to pinpoint the success factors for Swiss foreign trade in the future. The team of authors wishes you a pleasant read.

1 Excluding services and specialized trade. 2 Total of foreign direct investments, portfolio investments and bank and commercial lending. 3 However, the data provided by the Swiss National Bank permits no direct comparison over time.

Economic Research


1 Where to? Trading Partners

1.1 Diversification of Swiss Exports

Switzerland has benefited from increased globalization and the growing streams of world trade. Since 1990, Switzerland's exports have risen by just under 90% (inflation-adjusted) to 207 billion Swiss francs in 2008. As can be seen from Figures 1 and 2, European countries are responsible for the greater part of Swiss goods exports.

Figure 1 Switzerland's Most Important Export Destinations in 2008 Percentage share of Swiss goods exports

19.7%

9.6%

8.7%

8.6%

5.7%5.2%3.4%

3.3%

2.9%

2.8%

0.5%

9.7%

2.2%

17.7%

Germany

United States

Italy

France

China (incl. Hong Kong)

UK

Spain

Japan

Netherlands

Austria

EFTA

Rest of Europe

Other non-European industrialnationsEmerging and developing countries

Source: Swiss Federal Customs Administration

Figure 2 Geographical Breakdown and Growth of Swiss Exports Area: Percentage share of total Swiss goods exports in 2008. Red circles indicate real growth in exports in percentage terms, 1990-2008.

Export shares 20080% - 0.25%

0.26% - 1.00%

1.01% - 2.50%

2.51% - 7.50%

7.51% - 22.50%

Export growth 1990-200810.57% - 40%

40.01% - 80%

80.01% - 200%

200.01% - 350%

350.01% - 1025%

Source: Swiss Federal Customs Administration, Swiss Federal Statistical Office, Geostat, Credit Suisse Economic Research

Europe is Switzerland's predominant export destination

Economic Research


Germany, with a 19.7% share of Swiss exports, ranks far ahead of the next-placed European countries, Italy (8.7%) and France (8.6%). In total, 39.8% of all Swiss exports go to our neighboring countries and 61% to the European Union (EU). However, with the US (9.6%), China (including Hong Kong; 5.7%) and Japan (3.3%), non-European destinations also figure among the top ten export destinations. The proportion of non-European destinations has risen markedly over the past 18 years (Figure 2). In 1990, for example, only 3% of all Swiss exports went to China and Hong Kong. Adjusted for inflation, Swiss exports to China grew tenfold over this period, while Swiss exports overall nearly doubled. Exports to all BRIC nations (Brazil, Russia, India and China) showed above-average growth, their share of all Swiss exports rising from 5.2% to 9.4%. Another striking factor, besides the continuing dominant role of Europe, is thus increasing geographical diversification. Overall, Switzerland's export economy has managed to open up new markets and increasingly has more than one leg to stand on.

But how does the geographical diversification of Swiss exports compare with that of other countries? One widely used measure of concentration is the so-called Herfindahl index.

Box 1: Herfindahl Index

The Herfindahl index (also known as Herfindahl-Hirschman index) can be used for measuring concentration and is often applied in competition law, for example. If we apply it to thegeographical diversification of export recipient countries, the Herfindahl index H is the total ofthe squared export shares:

where ix represents the exports to country i and i=1…N is the set of all destinations. Theindex can assume values from 1 (maximum concentration on just one recipient) to 1/N(identical levels of exports to all countries, maximum diversification). The possible index valuestherefore depend on the number of trading partners involved. Source: OECD

With a Herfindahl index of 0.08, Switzerland has a relatively low concentration and lies somewhere in the middle of the OECD countries (Figure 3). Canada and Mexico show the greatest concentration. Not only do most of their exports go to their mutual neighbor, the US, but they are also linked with the US through the North American Free Trade Agreement (NAFTA). Bigger countries are less dependent on individual trading partners, as can be seen from the fact that for example the US or Germany have a higher level of geographical diversification than Switzerland. The high proportion of Switzerland's exports to Germany plays a crucial role here. However, Switzerland is better diversified than other medium-sized trading nations like Austria or Ireland. The variety of Switzerland's exports becomes even more apparent when one looks at diversification by continent. The Herfindahl index in this case works out at 0.47, while for Germany, for example, it is 0.56.

As globalization has advanced over past decades, the geographical diversification of world trade has also increased – a trend that has continued in recent years for most countries, including Switzerland. This is well illustrated by the dominance of green arrows in Figure 3, which indicate reduced concentration. The growing significance of up-and-coming trading nations like China, India and Vietnam has generated expansion opportunities for businesses in previously untapped markets.

Strong export growth in the developing economies

Herfindahl index for measuring export diversification

Switzerland less diversified than Germany within Europe, but more so in terms of continents

2

1 )( ∑ ∑ =

= N

i i

i x

x H

Economic Research


Figure 3 Geographical Export Diversification Herfindahl index for 2006. Lower values indicate greater diversification. Arrows indicate change since 1999.

0 0.10

0.20 0.30

0.40

0.50 0.60

0.70 0.80

Mex

ico

Can

ada

Cze

ch R

epub

lic

Aus

tria

Luxe

mbo

urg

Nor

way

Por

tug

al

Bel

gium

Hun

gary

Icel

and

Irela

nd

Net

herla

nds

Pol

and

Slo

vak

ia

Jap

an

Aust

ralia

Sou

th K

orea

New

Zea

land

Sw

itzer

lan

d

US

De

nmar

k

Spa

in

Fran

ce

UK

Finl

and

Ger

man

y

Gre

ece

Ital y

Sw

eden

Turk

ey

Source: OECD, Credit Suisse Economic Research

1.2 An Overview of Switzerland's Trade Policy

Impressive growth of this kind has been fueled not least by improvements in the operating framework for Swiss exporters. The World Trade Organization (WTO) was founded in 1995, and has led to the dismantling of a variety of trade barriers. Lower excise duties make Switzerland's export goods cheaper in recipient countries, thereby making them more attractive, while lower non-tariff trade barriers (e.g. incompatible technical regulations) lead to reduced information and compliance costs for companies. The WTO is the basis for Switzerland's trade policy. Switzerland has been a member of the General Agreement on Tariffs and Trade (GATT), the predecessor to the WTO, since 1966. The WTO provides a binding framework for trading relationships for all its members. Disputes are referred to a Dispute Settlement Body. As a medium-sized trading nation, Switzerland draws particular benefit from this organization of world trade based on rules rather than power politics. Under the so-called Most Favored Nation rule (MFN), it also participates in the success of bigger WTO members. This basic principle of the WTO states that all WTO members must apply uniform conditions when trading with other WTO members.

One major exception to the Most Favored Nation principle, however, is bilateral or regional free trade agreements (FTAs) and customs unions between individual members. Steps toward greater integration for the WTO as a whole are agreed at so-called trading rounds, which since 1973 have been named after the location of the official opening. In view of the growing number of members (currently 153), the duration and complexity of the rounds have increased. Negotiations in the current Doha round have been mired for years, and despite regularly renewed hopes, no conclusion is yet in sight. Consequently, countries that are in favor of greater integration – including Switzerland – are increasingly resorting to bilateral free trade agreements.

Switzerland is a member of the European Free Trade Association (EFTA), but its member countries4 account directly for only half of one per cent of Switzerland's exports. However, most of the free trade agreements are concluded via EFTA. The latest examples of this are the agreements signed with Colombia and Peru at the end of 2008. The most important agreement overall is the bilateral FTA with the European Economic Community signed in 1972 (Figure 4).

4 Its members are Switzerland, Iceland, Liechtenstein and Norway.

The basis for Switzerland's trade policy is the WTO

Increase in bilateral free trade agreements

Most important free trade agreement (FTA) with the EU

Economic Research


Figure 4

Switzerland's Free Trade Agreements Unless otherwise indicated, the agreements are within the EFTA framework

Already in force Future

Country/Region Status/Remarks Country/Region Status/Remarks

EFTA Convention In force since 03.05.1960 Japan Signed on 19.02.2009

EEA In force since 01.01.1973; bilateral Canada Expected to come into force at the start of 2009

Turkey In force since 01.04.1992 Peru Signing planned for 2009

Israel In force since 01.07.1993 Cooperation Council for the Arab States of the Gulf 5

Signing planned for 2009

Faroe Islands In force since 01.03.1995; bilateral Colombia Signing planned for 2010

Palestinian Authority In force since 01.07.1999 Algeria Negotiations ongoing

Morocco In force since 01.12.1999 Thailand Negotiations ongoing

Mexico In force since 01.07.2001 India Negotiations ongoing

Macedonia In force since 01.05.2002 Albania Negotiations at a preparatory stage

Croatia In force since 01.09.2002 Serbia Negotiations at a preparatory stage

Jordan In force since 01.09.2002 Ukraine Negotiations at a preparatory stage

Singapore In force since 01.01.2003 Indonesia Negotiations at a preparatory stage

Chile In force since 01.12.2004 Russia Feasibility of an FTA under review

Tunisia In force since 01.06.2006 China Preparation of internal feasibility study; bilateral

Republic of Korea In force since 01.09.2006 US Swiss-US Bilateral Cooperation Forum

Lebanon In force since 01.01.2007

Egypt In force since 01.09.2008

SACU6 In force since 01.05.2008

Source: State Secretariat for Economic Affairs

Free trade agreements can be more easily tailored to meet the interests of the contracting parties than multilateral agreements, thereby enabling integration to be achieved more rapidly. On the other hand, precisely this aspect of bilateral agreements gives rise to the danger of creating a network of different rules in the individual agreements that tends, at least in part, to remove the advantages of the falling trade barriers by introducing increased information and compliance costs for businesses. Consequently, when concluding new agreements, Switzerland attempts to arrive at standardized rules under which companies are permitted to deliver to various contracting parties. However, while this mitigates the problem, it does not solve it. In the final analysis, although FTAs offer a pragmatic path toward more rapid integration, they cannot replace the WTO. If negotiations at WTO level remain difficult, a "third way" in which, for example, bilateral agreements would be open to other interested countries and hence become multilateral, could emerge as a long-term solution in trade policy.

Even if it transpires that progress in the Doha round remains unachievable, 2009 will see some important events in Swiss trade policy. For example, the entry into force of the FTAs with Canada and Japan represents progress for companies that export to these countries, while a successful conclusion to negotiations on the so-called 24-hour rule7 would prevent the emergence of disadvantages for companies trading with the EU. Other FTAs, including those with Ukraine, Russia and India, are also on the horizon.

5 Bahrain, Qatar, Kuwait, Oman, Saudi Arabia, United Arab Emirates. 6 Southern African Customs Union: South Africa, Botswana, Lesotho, Namibia and Swaziland. 7 For security reasons, the EU wants to enforce an advance notice regulation for imports in trade with third countries. This would result in considerable delays and costs for

Swiss exporters. Negotiations about changes to the freight transportation agreement, which is intended to dispense with the advance notice requirement for Swiss exports, are at an advanced stage and look likely to come to a successful conclusion.

FTAs: a pragmatic solution but no substitute for the WTO

Trade policy in 2009 with additional FTAs and avoidance of disadvantages in trade with the EU

Economic Research


2 Who? Sectors, Businesses and Regions

2.1 Sectors

If one looks at Switzerland's goods exports by sector, it is clear that chemical/pharmaceutical products are particularly popular abroad, accounting as they do for more than a third of Switzerland's export volume (Figure 5). Another facet of this knowledge- and research-intensive sector is biotechnology; its sales have increased ninefold in volume terms over the past ten years. Thanks to the strong weight of the pharmaceutical sub-sector, which serves the relatively non-elastic demand for "health," the entire chemical/pharmaceutical industry is exposed to much lower levels of economic fluctuation than other industrial sectors.

The second most important export sector, with a share of 15%, is mechanical engineering. As a so-called cross section industry, it provides goods to a multitude of industrial sectors. The demand for machinery is very sensitive to economic cycles. The more that is produced, the more machines are needed to produce it. Switzerland's mechanical engineering sector is characterized by technological leadership, which enables the sector to weather economic downturns relatively well. Knowledge has become increasingly important in this sector in recent years, which has made mechanical engineering increasingly service-oriented. Goods are not only produced and sold, they are also combined with a broad portfolio of services (customer service, maintenance, research).

Precision instruments represent another extremely important export segment. They account for around 15% of all goods exports. This sector includes watches, medical technology products and measurement and control instruments.8 While medical technology depends heavily on demand for healthcare services, measurement and control instruments are generally sold to industrial sectors. This means that measurement and control instruments are more sensitive to global investment cycles than medical technology. The watchmaking industry supplies its products directly to the consumer. Swiss watches, as the epitome of accuracy and technological progress, are among the most popular in the world, especially in the luxury segment. 95% of all the watches produced in Switzerland are sold outside the country. The watchmaking industry is therefore one of the most export-oriented sectors of all.

Figure 5 Goods Exports by Sector in 2008 Percentage share of Swiss goods exports

14.9%8.1%

5.5%

5.1%

3.6%

2.0%2.3%

2.3%

1.2%

1.1%1.9% 1.4%

8.1%

35.1%

7.4%

Chemicals/pharma

Mech. engineering

Watchmaking

Metals

Precision instruments

IT and electrical eng.

Furniture

Food

Textiles and clothing

Plastics

Other veh. construction

Printing and publishing

Electronics

Auto

Other sectors


8 In the text below, watches will be considered separately from the other precision instruments unless otherwise stated.

Three export heavyweights: chemicals/pharmaceuticals to the fore…

… in front of mechanical engineering…

… and precision instruments

Economic Research


Following hard on the heels of these three export heavyweights are the metals industry (8.1%), IT and electrical engineering (5.5%) and the furniture industry (5.1%) – another three sectors that play an important role in Switzerland's export economy. Behind these come the food industry (3.6%), textiles and clothing (2.3%) and plastics (2.3%).

Figure 6 shows the long-term development of the major export sectors since 1990 (average annual growth rates). With the exception of the textiles and clothing industry, which has been struggling with structural problems for years, all sectors showed positive growth. The figure also shows that the growth rates of most of the sectors were subject to above-average fluctuation between 1990 and 2008. This is due to the fact that these sectors are particularly sensitive to economic cycles. Growth was particularly strong in the chemical/pharmaceutical and precision instruments sectors – two of our export heavyweights. The strong growth in demand for healthcare services made a key contribution to export success, as did the economic boom that lasted until 2007. Astonishingly, the other export heavyweights produced growth rates that were only slightly above average (watchmaking industry) or even below average (mechanical engineering). Although the watchmaking industry also benefited from the latest economic upturn, it produced substantially lower export growth rates between 1990 and 2008 than the frontrunners. In the case of mechanical engineering, export growth began to move into clearly positive territory only from 2005 onward. The comparatively high growth rates in food and plastics can be attributed primarily to the boom years from 2003 to 2007. In the case of the food industry, this particularly gratifying export trend was also due in part to the industry's success in passing on higher commodity prices to its customers. Thanks to their good positioning, food exporters also benefited from rapidly growing demand for high-value foods in emerging markets, and have significantly improved their geographical diversification in recent years.

Figure 6 Export Growth between 1990 and 2008 in Selected Sectors The size of the circles represents their percentage share of total Swiss goods exports

Other vehicle construction

AutoElectronics

Printing and publishing

Textiles and clothing

Furniture

Mech. engineering

IT and electrical eng.

Watchmaking

Plastics Metals

Food


Chemicals/pharma

-2%

0%

2%

4%

6%

8%

10%

0% 5% 10% 15% 20% 25%

Standard deviation of the growth rates

Ave

rage

ann

ual g

row

th ra

te

Total for Switzerland

Source: Swiss Federal Customs Administration, Credit Suisse Economic Research

Above-average dynamism in most sectors

Economic Research


Box 2: Service Exports

This study focuses solely on goods exports. They make up most of foreign demand and are often easier to trade than services. However, the service sector still accounts for around 25%of total Swiss foreign trade and therefore also has an important part to play. The mostimportant service exports are cross-border banking and insurance services, transportation services and tourism. However, receipts from transit trade transactions and from licenses andpatents are also included. According to the WTO, Switzerland has a share of over 6% of global service exports in the banking and insurance sectors and is therefore in third place, behind the US (19%) and theEU (26%). In fact, in GDP terms, Switzerland holds the top spot: Swiss service exports in thefinancial sector account for 4% of GDP as compared with about 0.5% in the US and EU.

2.2 Companies

A glance at the business census of 2005 reveals that 99.6% Swiss businesses are small and medium-sized enterprises (SMEs). These include micro-businesses with up to nine employees, small businesses with between 10 and 49 employees, and medium-sized businesses employing between 50 and 249 people. Large companies, which employ 250 or more people, account for only around 0.4% of Swiss businesses overall. Figure 7 shows the business structure of Switzerland's industrial companies (approx. 23.5% of all businesses).

Figure 7 Business Structure of Swiss Industry (2005)

Export Orientation

Business Size Number As a % of all businesses

Number* As a % of the

businesses of one business size

Micro (1 - 9 emp.) 57,618 79.3% 5,695 9.9% Small (10 - 49 emp.) 12,031 16.6% 3,285 27.3% Medium-sized (50 - 249 emp.) 2,510 3.5% 1,384 55.1% SMEs 72,159 99.4% 10,364 14.4% Large (250+ employees) 460 0.6% 293 63.7% Total 72,619 100% 10,657 14.7%

*No. of businesses replying "Yes" in the business census when asked whether they were involved in exporting goods and services.

Source: Swiss Federal Statistical Office

The figures show that Switzerland's thriving export economy is based on the activities of a mere 15% of all industrial companies, and that major companies are markedly more export-oriented than SMEs. More than 60% of all major companies in industry are involved in foreign trade, while a little over 14% of SMEs sell their goods abroad. As far as export orientation is concerned, however, the business census statistics throw up a few anomalies. For example, around 10% of industrial companies did not respond to the question about their export activities. It is therefore possible that these missing responses conceal businesses that could be classified as export-oriented. Figure 7 assumes that these businesses are not export-oriented. Moreover, it should be noted that the almost 11,000 businesses do not include those that supply the actual exporters. These supply companies are indirectly dependent on foreign trade and also make an important contribution toward the success of Switzerland's export economy. Although only about 15% of all industrial companies can be designated as export-oriented, these companies actually employ 44% of all those working in the secondary sector. Export companies therefore provide more than one job in three in Swiss industry.

SMEs as the backbone of the economy

Major companies are more export-oriented

Economic Research


2.3 Regions

As mentioned above, chemicals, precision instruments and mechanical engineering represent the most important export sectors in the Swiss economy. The main export destinations are the EU (primarily Germany), the US and China (including Hong Kong). What is the picture at cantonal level? The sectoral composition of its economy is enormously important for the performance potential of any canton and has a key influence on its export portfolio.

Basel-Stadt, Zurich, Geneva, Berne and Vaud are the most important cantons for Swiss foreign trade. Together, they account for half of national exports. In order to assess the export-orientation of a canton independently of its size, the exports are considered in relation to the number of those employed in the industry. This ratio is referred to as export intensity.

Figure 8 shows the export contributions and export intensities of all cantons in 2008. The proportion of cantonal exports in relation to overall Swiss exports is illustrated by the size of the circles. The export intensity of each canton is shown in the canton outline: the darker the area, the more export-oriented the canton. Basel-Stadt is not only responsible for the greatest export contributions in absolute terms; this canton also has the highest export intensity thanks to its specialization in chemicals and pharmaceutical products. Export products from the high-tech industries (particularly chemicals/pharmaceuticals and precision instruments) also help the cantons of Zug, Geneva, Neuchatel and Fribourg to leading positions in export orientation (in descending order of intensity). On average, the export volume is CHF 219,731 per employee.

Figure 8 Proportion of Exports by Canton and Export Intensity in 2008 Area of canton: export intensity in CHF per employee. Red circles: percentage share of total Swiss goods exports

0 60 12030 km

Share of total CH exports

0.05% - 0.60%0.61% - 1.25%

1.26% - 3.73%

3.74% - 5.72%

5.73% - 22.68%

Export volume peremployee in CHF

57,300 - 105,106105,107 - 136,515136,516 - 169,948169,949 - 218,055218,056 - 1,409,639

Source: Swiss Federal Customs Administration, Swiss Federal Statistical Office, Geostat, Credit Suisse Economic Research

The following section will look at Switzerland's top three exporting cantons (in terms of export intensity) and subject them to closer scrutiny. The main focus will be on export structure by sector and country.

The export strength of Basel-based industry is especially clear when one compares per capita exports. In 2008, this canton accounted for exports of CHF 252,296 per capita. This is just under ten times the Swiss average of CHF 27,000. The Canton of Basel-Stadt has a balanced

Export contributions vs. export intensity

High-tech industry is the top export performer

Export intensity as a selection criterion

Basel-Stadt holds pole position

Economic Research


export structure in terms of the countries it exports to (Figure 9). In contrast, the chemical/pharmaceutical industry occupies a predominant position in the canton's export statistics, accounting for 95% of Basel exports (Figure 10). This applies, as already mentioned in the previous section, to a lesser extent to Switzerland as a whole. 61% of national exports from the chemical/pharmaceutical industry originate in Basel-Stadt. Almost half of the industrial landscape of the canton also consists of chemical and pharmaceutical companies.

Figure 9 Basel-Stadt Export Destinations in 2008 Percentage share of Basel-Stadt's goods exports

14%

8% 5% 5% 3%

3% 2%

34%

7%

9%

10%

Germany

France

Italy

US Spain

Japan

UK Brazil

Canada

Austria

Other countries


Figure 10 Basel-Stadt Export Sectors in 2008 Percentage share of Basel-Stadt's goods exports

94%

1%2%

3%

Chemicals

Auto


Metals

Food

Electrical eng.

Mechanical eng.

Oil refining

Furniture

Metal products

Other sectors


28% of Canton Zug's exports go to Germany (Figure 11). Although the canton plays a subordinate role as a production location for chemical/pharmaceutical products, this export sector is prominent in the canton's foreign trade statistics (Figure 12). At first glance this may seem unexpected, but a closer look at the canton's sectoral structure provides the explanation. Zug is namely very attractive for distribution companies, with the result that around 5% of Switzerland's chemical/pharmaceutical goods exports are processed via this canton.

Figure 11 Zug's Export Destinations in 2008 Percentage share of Zug's goods exports

28%

14%

7%6% 5% 5%

4% 3%

2% 2%

24%

Germany

US

France

Italy

Belgium

Spain

UK

Netherlands

Canada

Austria

Other countries


Figure 12 Zug's Export Sectors in 2008 Percentage share of Zug's goods exports

43%

27%

6%

3%

3%

3%

2%

2%

2% 8%1%

Chemicals


Mechanical eng.

Oil refining

Metal products

Paper

Auto

Plastics

Electronics

Food

Other sectors


Zug: export strength thanks to distribution companies

Economic Research


Despite its low level of industrialization9 (17.4%) the Canton of Geneva accounts for around 8% of Swiss exports. The resulting export intensity is far higher than the Swiss average. Precision instruments occupy a prominent position in the canton's sectoral structure, a fact that is also reflected in the foreign trade statistics (Figure 13). The highest demand for products from the Canton of Geneva is from the US, France and Hong Kong (Figure 14).

Figure 13 Geneva's Export Destinations in 2008 Percentage share of Geneva's goods exports

14%

13%

12%

8% 6% 5% 4%

3% 3%

2%

30%

US France

Hong Kong

UK Germany

Italy Singapore

Japan

United Arab Emirates

China

Other countries


Figure 14 Geneva's Export Sectors in 2008 Percentage share of Geneva's goods exports

40%

19%

14%

14%

2%

2%1%

0%1% 6%1%


Furniture

Mined/quarried materials

Chemicals

Mechanical eng.

Electrical eng.

Metal products

Auto

Oil refining

IT equipment

Other sectors


The preceding analysis of the export structure provides indications of the strategic competitive position of the cantons in the foreign markets. It also documents the extent to which the cantons are dependent on foreign demand and particular sectors. One-sided dependence on one industry or country is problematic for economic development in the region, especially in times of crisis. Diversifying the export structure, i.e. spreading exports across a range of sectors and countries, leads to a reduction in overall risk. Broad risk diversification can reduce the susceptibility of a region to a single event. For example, a boom in the US combined with a strong dollar can have a positive impact on a canton's foreign trade activity. In contrast, a slump in consumer confidence and higher prices caused by a relatively strong Swiss franc can adversely affect a canton's exports. Sector-specific crises in export markets can also have a direct impact on a canton's balance of payments.

In order to compare the export diversification of the cantons, we will once again use the Herfindahl index from section 1.1. Figure 15 shows the export concentrations of the cantons by sector and country, whereby the diagonal represents uniform diversification.

9 No. of employees in the secondary sector as a percentage of the total number of employees.

Geneva also shows above-average export intensity

Diversification of the export portfolio reduces risk

Economic Research


Figure 15 Export Concentration by Sector and Country in 2008 Herfindahl index. Vertical axis: concentration by country. Horizontal axis: concentration by sector Values between 0.1 and 0.2 are designated as moderately concentrated; values above 0.2 are highly concentrated

JU

GE

NE

VS

VDTI

TG

AG

GRSG

AI

AR

SH

BL

BS

SO

FRZG

GL

NW

OW

SZ

UR

LU

BEZH

CH

0

0.05

0.1

0.15

0.2

0.25

0.3

0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1

Concentration by sector

Con

cent

ratio

n by

cou

ntry

Dec

reas

ing

dive

rsifi

catio

n

Decreasing diversification


As described in section 1.1, the portfolio of countries to which Switzerland exports goods is relatively well diversified. However, the heterogeneity of the regional export structure implies that individual cantons may be affected to differing degrees, depending on their export portfolio.

The Cantons of Zurich and Ticino have export structures with the lowest exposure to country- and sector-specific risks. Any drop in demand relating to either of these two factors is ideally cushioned in these cantons. Basel-Stadt has a high sector-specific concentration in its export structure; the canton's income from foreign trade depends heavily on the success of the chemical/pharmaceutical industry. Aargau, Vaud, Geneva, Neuchâtel and Obwalden are in a similar risk class (high sector-specific concentration, low country-specific concentration). Around 40% of their exports are dependent on a single economic sector. The contribution that these cantons make to Swiss foreign trade as a whole is significant, which means that any setbacks in their major markets could well have an impact on the national statistics.

The export profiles of the Cantons of Glarus, Basel-Land, Zug, Valais, Grisons and Nidwalden have less diversified export portfolios. The risk inherent in a strong sector-specific concentration is further heightened by dependency on individual countries. A single trading partner accounts for around 25% of the export volumes of these cantons. The income that these cantons derive from foreign trade is therefore also dependent on the economic health of individual trading partners. Nidwalden, with its high sector-specific concentration and relatively high one-sided dependency at country level, is especially conspicuous in this context.

Low concentration in Zurich and Ticino, high concentration in Basel-Stadt

Economic Research


3 What? Competitive Advantages and Quality Aspects

3.1 Comparative Advantage at an International Level

The economic theory of international trade assumes that every country produces goods and services which it can produce relatively cheaply in comparison with other countries, i.e. with lower opportunity costs.10 A simple example should make this principle clear:

Box 3: Absolute and Comparative Advantage – Mobile Phones and Notebooks

Absolute advantage Country A requires 8 hours to manufacture a notebook. Country B requires 10 hours tomanufacture the same notebook. However, country A requires 1 hour and country B 20 hoursto manufacture a mobile phone. Country A can therefore manufacture the notebook and mobile phone more quickly than country B and thus has an absolute advantage for bothproducts. Relative advantage and opportunity costs Now, if country A produces 1 notebook, it consequently fails to produce 8 mobile phones.Country B in contrast fails to produce only half a mobile phone while it is producing anotebook. Country B therefore has a comparative advantage in the production of notebooks.Or to put it another way, the opportunity costs of producing a notebook are lower in country B.

Opportunity costs 1 notebook 1 mobile phone Country A 8 mobile phones 1/8 of a notebook Country B 1/2 of a mobile phone 2 notebooks

It is therefore efficient for country B, despite the absolute advantage of country A, tospecialize in the production of notebooks and for country A to specialize in producing mobilephones. In concrete terms, country A has a comparative advantage in the production of mobilephones, while country B has a comparative advantage in the production of notebooks. Country A should therefore specialize in the production of mobile phones while country B specializes innotebooks.

Comparative advantages between countries arise as a result of relative differences in their ability to access labor and capital.11 One could imagine, for example, that Switzerland has a comparative advantage over China in knowledge-intensive goods (e.g. precision instruments), while China for its part has a comparative advantage in labor-intensive goods (e.g. textiles and clothing). Since it is very difficult in practice to quantify comparative advantage directly, Bela Balassa developed a concept in 1965 that permits the indirect measurement of comparative advantage.12 This is the "Revealed Comparative Advantage" (RCA). The idea behind the RCA is simple: Whenever a country has a comparative advantage in particular sectors (or in particular products), it will tend to concentrate on these sectors in its foreign trade. The proportion of exports from these sectors should therefore be higher than the proportion of exports from the same sectors in other countries. According to Balassa, the RCA is calculated as follows:

10 This principle is based on the theory of comparative advantage as proposed by David Ricardo in 1817. 11 This principle goes back to the 1933 Heckscher-Ohlin theorem. 12 Bela Balassa (1965), Trade Liberalization and "Revealed" Comparative Advantage, The Manchester School 33, 99–123.

Absolute and comparative advantage

RCA – a simple measure of comparative advantage

Economic Research


… Proportion of exports of sector i of country j

… Proportion of exports of sector i of all countries

Since the RCA has no theoretical maximum but cannot be less than 0, it is difficult to compare comparative advantages (where the RCA is greater than 1) with comparative disadvantages (where the RCA is less than 1). In order to overcome this deficiency, we can normalize the function, which results in an RCA that fluctuates symmetrically between -1 and +1:13

RCA* > 0 … revealed comparative advantage

)1()1(*

+−=

RCARCARCA RCA* < 0 … revealed comparative disadvantage

RCA* = 0 … neither advantage nor disadvantage

Figure 16 shows the RCA* values (in 2006) of a range of export sectors in an international comparison. The study looked at Switzerland's most important export destinations, namely Germany (D), the US (U), Italy (I), France (F) and Great Britain (G).

Figure 16 Revealed Comparative Advantages in an International Comparison RCA* normalized; CH=Switzerland, D=Germany, G=Great Britain, I=Italy, U=US, F=France


The diagram shows that Switzerland has a clear comparative advantage vis-à-vis its major trading partners in the areas of watchmaking, chemicals/pharmaceuticals and precision instruments – the proportion of exports in these sectors is above the international average. In other sectors, however, there is often a considerable comparative disadvantage. This is particularly obvious in the auto and food sectors; here, Germany and France have a clear edge.

13 This normalization was proposed by Keld Laursen in 1998.

Clear comparative advantage in high-tech sectors

FDCH G UI

-1 +1

FD CHGUI

-1 +1

F DCHG U I

-1 +1

FDCH GU I

-1 +1

F DCH G U I

-1 +1

FCH GUI

-1 +1

F D CHG UI

-1 +1

IU G CH D F

-1 +1

I UGCH DF

-1 +1

Food

Chemicals/pharma

Plastics

Metal industry

Electronics


Watchmaking

Auto and vehicle manufacturing

Food

Chemicals/pharma

Plastics

Metal industry

Mechanical engineering

Electronics


Watchmaking

Auto and vehicle manufacturing

Disadvantage Advantage

Mechanical engineering

∑i

ij

ij

XX

∑∑

∑

∑=

i jij

jij

iij

ij

ij

X

X

XX

RCA

∑∑

∑

i jij

jij

X

X

Economic Research


There are only minor differences between the countries in the mechanical engineering sector. Clearly, the individual countries have all reached a similarly high level of specialization. There are also only minor differences among the various countries in relation to the plastics sector, except that here Great Britain and Switzerland are at something of a disadvantage.

Since 1990, the revealed comparative advantages of Switzerland's export industry have not changed significantly (Figure 17). Overall, there was a slight improvement in all the sectors under review. We actually improved our leadership position in the chemical/pharmaceutical industry. Our positioning in the watchmaking industry and in precision instruments has remained essentially unchanged. We were able to significantly reduce our comparative disadvantage only in the food sector, which has experienced a real boom in the last three years. Thanks to their good positioning, food exporters are benefiting, as already mentioned, from the rapidly growing demand for high-value foods in emerging markets. The picture in the electronics sector is quite different. Here, the comparative disadvantage has grown markedly since 1990. One reason for this trend is likely to be the comparative advantage enjoyed by low-wage economies, particularly in labor-intensive production processes, which has become more apparent in the wake of globalization.

Figure 17 Comparative Advantage Trends since 1990

-1.2 -0.8 -0.4 0.0 0.4 0.8 1.2

Wat

chm

akin

g

Che

mica

ls/p

harm

a

Pre

cisi

on in

stru

men

ts

Mac

hine

r y

Pla

stics

Met

als

Elec

troni

cs

Food

Aut

o an

dve

h. c

onst

r.

RCA* 2006 RCA* 1990


3.2 Quality Aspects – Export Unit Value

The RCA* analysis showed that Switzerland's foreign trade is relatively well positioned. Almost 50% of our export products come from sectors in which we have a clear comparative advantage over our main trading partners. This is important because comparative advantages are also conceivable in sectors that have little relevance to exports. So the strengths of our export economy lie in knowledge- and research-intensive areas, and in the concentration on innovative, high-tech products. This makes good sense, because the fact that Switzerland is a high-wage economy makes it difficult for many exporters to compete on price terms. So the key strategic success factor is quality. An approximate measure of the quality of export products is the so-called export unit value – the export value per kilogram.

)(____

kgweightExportvalue(CHF)ExportValueUnitExport =

Therefore, as a product increases in quality, the relationship between its value and its weight, and therefore its unit value, rises accordingly.

Stable trend since 1990

Export unit values

Economic Research


In a 2006 study, we looked in detail at how Switzerland has performed in international quality competition terms since 1990.14 Economies with a high proportion of high-tech and high-quality goods have a higher unit value than countries that tend to specialize in standardized, homogeneous products with few process stages. Qualitative features (design, technology, innovation, etc.) justify a higher price because their input factors (labor and capital) are high-value and because a complex production process is involved. As a matter of fact, Switzerland has an extremely high unit value compared with other countries. Once again, it is the usual suspects that are responsible, namely watchmaking, pharmaceuticals and precision instruments (Figure 18). In addition, the electronics sector, in which Switzerland occupies a leading position in the area of research, has a relatively high unit value. In Figure 18, the pharmaceutical industry is deliberately shown separately in order to highlight its quality leadership.

Figure 18 Unit Values of Selected Sectors in 2008 In CHF per kg

0 50

100 150 200 250 300 350 400

Wat

chm

akin

g

Pre

cisi

on in

str.

Pha

rma

Ele

ctro

nics

Mac

hine

ry

Aut

o an

d ve

h.

cons

truct

ion

Tota

l

Pla

stic

s

Che

mic

als

Met

als

8520

Increasing quality/technology orientation


A look at the unit values suggests a reason for the revealed comparative advantages in Figure 16. Above-average unit values can be observed precisely in those sectors in which Switzerland has clear comparative advantages. One important reason for the comparative advantages is therefore the high quality of the export products in the high-tech sector. High quality is a key strategic success factor, as it justifies higher prices. And this is crucial because Switzerland, with its high-wage economy, has little scope for competing on price in the international context.

3.3 Is Switzerland a "Bazaar Economy"?

Thanks to the high-quality products that it produces, Switzerland is one of the world's most successful trading nations. High levels of exports do not necessarily go hand in hand with high levels of added value domestically. In 2003, German economist Hans-Werner Sinn, confronted with the paradox that Germany was suffering record levels of unemployment despite being the world's leading export nation (in goods trading), coined the term "bazaar economy."15 He is referring to a trading location in which products from all over the world are bought and sold – like at a bazaar – but where less and less is actually manufactured, with the result that very little value is added to the domestic economy. German companies are relocating more and more of the labor-intensive production stages abroad and leaving only the more capital-intensive finishing

14 Swiss Issues: Sectors; Quality – the Export Industry's Only Chance?, Credit Suisse Economic Research, 2006. 15 Hans-Werner Sinn (2003), Der kranke Mann Europas: Diagnose and Therapie eines Kathedersozialisten, Deutschland-Rede, Stiftung Schloss Neuhardenberg. For an

exposition of the bazaar hypothesis, see also Hans-Werner Sinn (2005), Die Basarökonomie. Deutschland: Exportweltmeister or Schlusslicht? Berlin [available in German only].

Quality as a strategic success factor

Bazaar effect: high proportion of foreign inputs, low domestic added value and employment

Economic Research


processes to be completed in Germany. The vertical range of manufacture in the domestic market falls accordingly. The meager impact of exports on employment therefore counteracts the actually positive signal of Germany's success as an export economy.

However, the bazaar hypothesis is not without its detractors. After all, the division of labor internationally is a general phenomenon of globalization and as such by no means limited to Germany alone. By exploiting the comparative advantages of the various partner countries, this approach also promises increased efficiency and competitiveness. Sinn's actual criticism is therefore directed not at the principle of international value-added chains, but at the extent to which Germany uses this process. The Swiss economy, just like Germany's, places a strong emphasis on exports. So, has Switzerland also become a bazaar economy?

As one might expect in view of ever-increasing globalization, the level of gross added value has been falling in both countries since 1990 (Figure 19). However, the decline in Germany is more pronounced than in Switzerland, where – apart from some minor fluctuations – the trend has been more or less static since 1997. Following a convergence in 1994/1995, the gap between the two countries has now increased to the point where the level of added value in Switzerland is clearly higher than that in Germany. This is all the more remarkable since the proportion of domestically produced primary products normally grows in line with the economy, as larger economies are more likely to have the desired primary product available domestically.

Figure 19 Bazaar Effect in Germany and Switzerland (1990–2007) Percentage of gross value added by manufacturing trades to own production

30%

32%

34%

36%

38%

40%

42%

1991 1993 1995 1997 1999 2001 2003 2005 2007

Switzerland Germany

Source: Swiss Federal Statistical Office, Federal Statistical Office of Germany, Credit Suisse Economic Research

If one looks at this trend in greater detail for individual sectors, the message from Figure 19 is confirmed. The bazaar effect is clearer and incomparably stronger in Germany than in Switzerland (Figures 20 and 21). Since 1997, domestic added value has fallen drastically in all the sectors under consideration in Germany and in most cases by more than 4 percentage points (PP). The bazaar effect is most striking in the auto industry. Here, the level of added value has fallen by almost 6 PP. Having come under enormous pressure from increased international competition, not least from the Far East, German auto manufacturers began relocating more and more of their production abroad. This enabled the auto industry to retain its exceptional position in the German economy and to recover some of the share of Germany's overall added value that it had lost in the 1990s. In Switzerland, the differences between the sectors are much less pronounced and fluctuate between approximately +3 and -3 PP. Unlike the situation in Germany, it is clear that, since 1997, certain sectors have even been able to increase the proportion of gross value added in domestic production. However, some sectors also suffered declines and were clearly subject to the bazaar effect. Sectors showing

The right medicine – kill or cure?

Bazaar effect more pronounced in Germany than in Switzerland, both on a national basis…

… and at sector level

Economic Research


comparatively large declines in Switzerland are plastics and food. The declines in these sectors can be attributed primarily to increased international integration.

Figure 20 Bazaar Effect in Germany Change in gross value added in domestic production in percentage points (PP), 1997-2006

-8%

-6%

-4%

-2%

0%

Pre

cisi

onIn

stru

men

ts

Text

iles

and

clot

hing Fo

od

Che

mic

als/

phar

ma

Oth

er v

eh. c

onst

r.

Prin

ting

and

publ

ishi

ng

Mec

hani

cal e

ng.

IT a

nd E

lect

rical

eng. M

etal

s

Furn

iture

Pla

stic

s

Aut

o co

nstru

ctio

n

Source: Federal Statistical Office of Germany, Credit Suisse Economic Research

Figure 21 Bazaar Effect in Switzerland Change in gross value added in domestic production in percentage points (PP), 1997-2006

-4%

-2%

0%

2%

4%

Mec

hani

cal e

ng.

IT a

nd E

lect

rical

eng.

Pre

cisi

onin

stru

men

ts

Oth

er v

eh. c

onst

r.

Met

als

Che

mic

als/

phar

ma

Prin

ting

and

publ

ishi

ng

Aut

o co

ntr.

Furn

iture

Text

iles

and

clot

hing

Pla

stic

s

Food

Source: Swiss Federal Statistical Office, Credit Suisse Economic Research

Until a few years ago, the reasons behind the negative impact of the German bazaar effect on employment figures were the high – by European standards – German labor unit costs and Germany's expensive and bureaucratic social security system. In order to remain internationally competitive, German companies attempted to avoid the high level and complexity of German wage and non-wage labor costs. They did this on the one hand by increasing the level of automation and on the other by outsourcing particularly labor-intensive activities abroad. Through several social reforms and, above all, through relative restraint in real wage growth vis-à-vis many other Western European countries, it proved possible to increase the competitiveness of Germany's export economy once again from 2004 onward (Figure 22). A growing bazaar effect (Figure 19) and falling unemployment were no longer mutually exclusive. This illustrates the positive aspect of the German bazaar economy. In comparison with Switzerland, geography and the process of European unification enabled Germany to internationalize the division of labor by relocating manufacturing processes abroad at an earlier stage and to a greater extent, especially to Eastern European EU countries. Labor costs in Switzerland too have risen only moderately since 2000. As a result of a more flexible labor market, lower taxes and its specialization in high-quality products on the one hand and the lower level of foreign economic integration with the new EU countries on the other hand, the vertical range of manufacture in Switzerland has barely declined at all.

There is no such thing as a "right" approach – either outsourcing or domestic production. Germany and Switzerland are pursuing differing strategies; Germany's export economy relies on foreign production, while Switzerland's depends on quality. Both countries have had successes with their strategies in recent years and have managed to increase their exports (Figure 23). Germany was increasingly able, at least during the boom years, to bring the previously negative effects of the bazaar strategy under control.

Negative consequences of the bazaar effect have decreased during the most recent boom

Differing approaches in Switzerland and Germany, but both remain successful trading nations

Economic Research


Figure 22 Labor Costs Index: 2000=100

90 100 110 120 130 140 150 160 170 180

1996 1998 2000 2002 2004 2006 2008

Germany France Netherlands Austria UK

Source: Eurostat

Figure 23 Foreign Trade Index: 1990=100

75

100

125

150

175

200

225

250

275

300

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Goods exports Germany Goods exports Switzerland

Goods imports Germany Goods imports Switzerland

Source: Swiss Federal Customs Administration, Swiss Federal Statistical Office, Federal Statistical Office of Germany

Economic Research


4 Outlook

4.1 Determinants of Swiss Exports

If the economic output of a country rises, the demand for products and services also rises. Hence, in a globalized world, the demand for imports rises too. Therefore, if the economies of our trading partners grow, foreign demand for Switzerland's products grows too. In this context, the value of the Swiss franc against the currencies of our trading partners also plays an important role. A weaker Swiss franc increases the competitiveness of Swiss products, as they can then be bought more cheaply abroad. In both cases, the result is to vitalize Swiss exports. But how much of an impact does each of these factors have? In other words, which is more important – exchange rates or the economic environment? This question can be answered by looking at export elasticity as it is affected by foreign demand and exchange rates. Export elasticities measure the change in Switzerland's exports when the economic growth of our trading partners accelerates by 1% or when the Swiss franc increases by 1% in value relative to another currency (Figure 24). A value greater than one indicates an elastic reaction, while a value less than one indicates inelasticity.

Figure 24 Export Elasticities as Affected by Changes in Foreign Demand and Exchange Rates* Column 2: Export elasticity by trading partner growth. Column 4: Export elasticity by exchange rate (rise in value of the Swissfranc).

Country Export elasticity by foreign demand

Currency Export elasticity by exchange rate

Germany 2.0 EUR -0.5

France 1.6

Italy 3.0

Spain 2.5

Netherlands 1.9

Austria 1.3

UK 1.3 GBP -0.4

US 1.9 USD -0.4

Japan 2.4 JPY -0.2

Total Swiss exports 2.0

* The export elasticity by trading partner growth (exchange rate) for a country x indicates by how many percent Swiss exports to country x will increase if the economic growth of country x (the bilateral exchange rate of country x to the Swiss franc) rises by 1 percent. Data basis: 1990-Q3 2008,

Source: Swiss Federal Customs Administration, Datastream, Credit Suisse Economic Research

Exports to Italy are highly elastic. If Italian economic growth increases by 1%, Swiss exports to Italy rise by 3.0%. Spain, which until the recent downturn not only managed to generate very high GDP growth rates but was also an above-average importer of Swiss products (+194% since 1990), also has a high level of export elasticity (2.5). Japan, the first non-European country on the list, is the next most elastic importer of Swiss goods. This means that Switzerland's export economy – as a whole – can absorb a downturn in the economies of some of its trading partners to a certain extent. Swiss exports overall exhibit an elasticity of 2.0, indicating that exports are elastic with regard to foreign demand. The euro is the most important currency for Swiss exports. More than half of all exports go to the euro zone. The export elasticity with regard to fluctuations in the euro exchange rate is also the highest (-0.5). If the Swiss franc loses 1% of its value against the euro, Swiss exports rise by 0.5%. The British pound and the US dollar are next, with an elasticity of -0.4. However, compared with the influence of growth in the economies of Switzerland's trading partners, the influence of all the currencies under consideration is slight. Switzerland's exports are relatively

What is the impact of increased foreign demand and higher exchange rates on Swiss exports?

Export elasticity greatest in the case of exports to Italy

Export elasticity with regard to exchange rates weaker than with regard to foreign demand

Economic Research


inelastic as regards exchange rate movements. Economic growth plays a bigger part in all countries. Any extrapolation of future Swiss exports should therefore be based on the economic outlook for our foreign trade partners.

4.2 Export Barometer

The readings produced by our export barometer depend on the significance of foreign demand for Swiss exports. It provides a leading indicator of the health of a particularly important part of the Swiss economy, and thereby provides important pointers to future economic trends in Switzerland.

In constructing the export barometer, we have drawn together important leading industry indicators (i.e. the Purchasing Managers' Indices) in Switzerland's 28 most important export countries. The indicators are calculated on a monthly basis by the OECD, and provide an approximate six-month forecast horizon on the economic trends affecting industry. The values of these leading indicators are standardized and weighted on the basis of the share of exports that goes to each country. The export barometer then consolidates this information to produce a single indicator. Since the values in question are standardized, the export barometer is calibrated in standard deviations. Figure 25 shows the export barometer (1st quarter shifted into the future) and Swiss export volumes. The chart underlines the nature of the export barometer as a forecasting tool; the correlation between export growth (moving average over 6 months) and the barometer with a lead-time of one quarter is a good 0.74. If one takes a lead-time of two quarters, the correlation coefficient is still 0.61.

Figure 25 Export Barometer for Industry as a Whole In standard deviations

-6

-4

-2

0

2

4

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Export trend growth (6-month moving average)

Exports (vs. previous year)

Barometer (+1Q)

Source: OECD, Swiss Federal Customs Administration, Datastream, Credit Suisse Economic Research

Since mid-2007, the export barometer has been on a downward path that has steepened drastically since October 2008. In fact, foreign trade has been suffering a downturn since mid-2007. In the fourth quarter of 2008, Swiss exports actually fell (-4.4%) year-on-year for the first time in 20 quarters. The situation looks unlikely to change in the coming months. The export barometer predicts a further weakening in foreign trade activity. Exports will probably decline even more steeply in the coming months. The main reason for the entirely negative export forecasts can be found in the economic plight of our partner countries. The US, Japan and a number of European countries are in the grip of recession. At the same time, growth in the emerging and developing economies has fallen away sharply. Despite a battery of state interventions and economic stimulus packages, the recession is set to persist for some time yet

Export barometer – an indicator of the health of the Swiss economy

Leading indicators at the heart of the barometer

Gloomy outlook for the near future

Economic Research


in the industrialized countries, and positive signals from the rest of the world will continue to remain muted.

In addition to providing forecasts for exports as a whole, the export barometer also makes forecasts about specific sectors. Figure 26 lists export barometer values by sector and compares the average value for 2008 with the lead-time value for august 2009. The resulting forecasts for export trends in these sectors can be found in the right-hand column of Figure 26.

Figure 26

Export Barometer and Export Forecast In standard deviations

Correlation*

Barometer

Mean value 2008 Barometer august 09

Forecast downturn

until 08.09** Industry as a whole 0.61 0.83 -3.72 -2.75 High-tech industry 0.58 0.82 -3.78 -2.69 - Mechanical engineering 0.75 0.94 -3.69 -3.46 - Electrical engineering 0.61 0.96 -3.60 -2.79 - Precision instruments (including watches)

0.60 0.75 -3.79 -2.70

- Auto industry 0.38 0.97 -3.48 -1.67 - Other vehicle construction

0.10 0.74 -4.54 -0.48

- Chemicals/ pharmaceuticals

0.11 0.76 -3.78 -0.52

- Plastics 0.48 0.91 -3.60 -2.16 - IT equipment 0.38 1.01 -3.79 -1.81 - Electronics 0.21 0.87 -3.69 -0.96 Traditional industry 0.31 0.84 -3.60 -1.38 - Food 0.41 0.86 -3.68 -1.87 - Manufacture of basic metals

0.41 0.93 -3.31 -1.73

- Fabricated metal products

0.68 0.93 -3.66 -3.15

- Textiles 0.55 0.88 -3.45 -2.39 - Clothing 0.09 0.53 -3.23 -0.35 - Paper 0.42 0.98 -3.54 -1.91 - Printing and publishing 0.08 0.98 -3.44 -0.36

* Correlation between the trend growth of exports and the export barometer for each sector (6-month lead-time). ** Weakening allowing for the correlation. The meaningfulness of the export barometer reading is somewhat relativized by the correlation. So in "Other vehicle construction", for example, the fall in the barometer reading from 0.74 to -4.54 is very large, but the correlation of the barometer with the sector's exports is low. As a result, the forecast downturn is just 0.48 standard deviations. Source: OECD, Swiss Federal Customs Administration, Datastream, Credit Suisse Economic Research

It is apparent that exports will tend to continue to fall across industry as a whole in the coming months. The effect should be felt particularly strongly in the high-tech sector, namely in precision instruments, mechanical and electrical engineering. Here, the export barometer forecasts a reduction in the growth trend of up to more than three standard deviations below the long-term average. The sharp downturn in the high-tech sector relates to leading indicator trends in the export destinations. In mechanical engineering for example, above-average volumes are exported to Germany, while in the case of precision instruments relatively large volumes are sold to the US. In 2008, the leading indicators fell especially sharply in both countries. The outlook for the chemical/pharmaceutical industry, on the other hand, looks relatively solid; this sector is better diversified geographically and is less subject to economic fluctuations on the pharmaceuticals side. Textiles, food and metals – all representatives of traditional industry – also look likely to be badly hit by the fall-off in foreign demand. This gloomy outlook is predicated mainly on the general economic situation and does not detract from the strategically successful positioning of the watchmaking, precision instruments and chemical/pharmaceutical sectors, as analyzed in the preceding chapters. On the contrary, the strengths of these foreign trade sectors help them to master the economic trough comparatively well and prepare them for the next upturn.

Export forecasts at sector level

Economic Research


In addition to the specification by sector, the export barometer can also be used to examine the prospects for individual cantons. Instead of 27 sectors, we look at the 26 cantons. Our analysis shows that the downturn in the export barometer reading since the summer of 2007 has been especially marked in the Cantons of Zurich, Aargau, Geneva and Vaud (Figure 27).

Figure 27 Export Barometer for Various Cantons

Change in standard deviations since June 2007

-5.6

-5.4

-5.2

-5ZH VD AG Schweiz

Source: OECD, Swiss Federal Customs Administration, Datastream, Credit Suisse Economic Research

These three cantons together account for more than 20% of all Swiss exports. The particularly marked downturn in the export barometer can be attributed to the comparatively heavy concentration on exports of mechanical engineering products and precision instruments – two sectors in which the export barometer has fallen off especially strongly in recent times. In Vaud, for example, precision instruments account for approximately 26% of exports, while the Canton of Aargau generates 40% of its exports in mechanical engineering.

4.3 Current Outlook for the Swiss Economy

The Swiss economy cannot escape the worldwide economic crisis. Gross domestic product will shrink this year. The longest boom period since the 1980s is therefore coming to an end. The current downturn, just like the boom that preceded it, is being imported. The economic tailwind of export demand that drove the boom has clearly turned and become a hostile headwind.

The export barometer gives a very clear indication of the drop in pressure in the global trading climate. Recession in the export markets for Swiss goods has resulted in a fall-off in demand for products that are "Made in Switzerland." Exports to economies which are continuing to grow – such as China – do provide a form of economic safety net. However, their share of exports remains too small to offset the fall in exports to the US and Europe. Service exports are also affected. While the financial crisis has had a negative impact on exports of financial services, tourism is struggling due to the strength of the franc. The volume of Swiss exports is therefore likely to fall by 6.8% vis-à-vis the previous year. This is the first decline since 2003 and the most pronounced since records began in 1970. At the same time, the flood of national rescue and stimulus packages increase the risk that global trade will suffer as a result of protectionist measures. This would also have a negative effect on export volumes.

The fall-off in demand from abroad is causing many companies to revise their capital investment plans. Investment always reacts very directly to fluctuations in demand. Low earnings prospects combined with high levels of uncertainty are inimical to investment and it is precisely these two factors that characterize the current economic environment. Demand for capital goods has

Export barometer for cantons

Recession in Switzerland

Exports are directly affected

Marked drop in investment activity

Economic Research


therefore collapsed and will not be able to recover quickly. All in all, we anticipate a decline of 7.4% for investment in plant and equipment. Investment in construction will also exhibit a nega-tive trend, with the commercial sector (office, retail and industrial) likely to be particularly weak.

In contrast to the export market and investment, consumer spending has grown in the current year. Consumer spending has shown itself to be largely stable in past recessions too. As an impetus to growth, however, it is becoming increasingly ineffective. Private consumption is sig-nificantly influenced by the situation on the labor market. The rate of unemployment will rise in the course of the year to average 4.1% for the year. This is likely to place limits on the growth in consumer spending. We anticipate a slight increase in private consumption in Switzerland of only 0.9%.

At the beginning of the year inflation fell to almost zero in Switzerland and is set to remain at a low level. We think it quite unlikely that Switzerland will enter a deflationary spiral. It is improb-able that consumption and investment plans will be delayed on a large scale in expectation of even lower prices. Figure 28 summarizes our forecast for the economy.

Figure 28

Economic Forecast for Switzerland Real percentage change compared with previous year (at previous year's prices)

2006 2007 2008 2009 Gross domestic product, real 3.4 3.3 1.6 -2.0 Consumer spending 1.6 2.1 1.7 0.9 Government spending -0.9 -1.1 0.0 0.7 Investment in equipment 10.0 11.0 -0.8 -7.4 Construction investment -1.2 -1.4 -2.9 -1.9 Exports (goods and services) 10.0 9.5 2.3 -6.8 Imports (goods and services) 6.5 6.0 -0.2 -1.5 Unemployment rate in % 3.3 2.8 2.6 4.1

Inflation rate in % 1.1 0.7 2.4 0.2

Source: Credit Suisse Economic Research

Less Support from Con-sumption

From Inflation to Deflation Worries

Economic Research


5 Conclusions

The global economic downturn strikes right at the heart of the Swiss economy. As a highly networked economy, Switzerland benefits from global trade flows during the good times, and is also a major beneficiary of increasing globalization. However, when there is a downturn, it suffers accordingly; and exports, which had acted as a growth driver, become a major brake on growth.

Should one therefore conclude that Switzerland is doing something fundamentally wrong? Because Switzerland's domestic market is so small, its dependence on foreign trade cannot be avoided – at least not without a substantial drop in living standards. What Switzerland can influence, however, is its vulnerability to the global downturn and its medium-term positioning in the face of international competition. Switzerland must at least aim to be prepared for the next upturn. So what conclusions does this study reach in this regard?

Even if the immediate outlook does not appear particularly rosy, we can nevertheless take an overall positive view of the positioning of Swiss exporters. First, as far as its trading partners are concerned, Switzerland is relatively well diversified in comparison with similarly sized countries. The fact that its exports to emerging economies are growing rapidly indicates that even better diversification is likely in the future, which will tend to counter any one-sided vulnerability. In the current economic downturn, which has struck almost every country in the world at practically the same time, this is clearly cold comfort; but from a medium-term perspective it is an advantage on which Switzerland can build.

Second, Switzerland is strategically very well positioned with its focus on high-quality products. Our analysis shows that Switzerland has comparative competitive advantages, particularly in watchmaking, chemicals/pharmaceuticals, medical technology and measurement and control instruments. These are also the sectors whose exports enjoy above-average growth and whose efforts can therefore be expected to meet with success. With its knowledge- and research-intensive products, our country occupies a technology leadership position in many areas, and thanks to ongoing innovation, remains one step ahead of the competition. As long as it holds these trump cards, which are primarily down to the ready supply of highly qualified workers, it can more than offset the disadvantage of high wage and land costs. Consequently, Switzerland's exporters are in a better position to weather the current economic downturn than countries that compete on price alone. Importers cannot simply do without quality and innovation, which makes it difficult for them to desert Swiss exporters in favor of cheaper alternatives. But competition never stands still. New trading nations are making their mark on the world's markets, not only as customers but also as competitors. Switzerland must not shrink from this challenge. On the contrary, the aim must be to build on its strengths – quality and innovation – and thereby carry the successes of past years into the future.

Swiss Issues Sectors Swiss Foreign Trade – Facts and Trends...Switzerland's export goods cheaper...

Documents

Transcript of Swiss Issues Sectors Swiss Foreign Trade – Facts and Trends...Switzerland's export goods cheaper...