Free trade deal with India could give industry a boost
Published: Tuesday, Jan 23rd 2024, 12:50
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Switzerland will probably soon conclude a free trade agreement (FTA) with India. Although the exchange of goods with the now most populous country is currently still at a low level, this could change in the medium to long term once a definitive agreement has been concluded. Local industry in particular is likely to benefit.
Federal Councillor Guy Parmelin landed a surprise coup at the weekend: almost 16 years after the start of negotiations on an FTA between India and the EFTA states, to which Switzerland belongs, a basic agreement has been reached, the Economics Minister announced on the X online platform.
FTA as an "important piece of the puzzle"
Even if the details are not yet known and an agreement still has to go before parliament and possibly the people at a later date, the positive voices among economists outweigh the negative. "In principle, free trade agreements are very important for a small, open economy like Switzerland," says Michael Grass from the BAK Economics research institute. For industry in particular, they are an "important piece of the puzzle" in international competition.
Studies have shown that Switzerland's FTA with China, which came into force in 2014, has had a strong positive impact on trade between the two countries, adds Tim Reinicke from the KOF Swiss Economic Institute at ETH Zurich. Sectors such as the watchmaking, machinery, electronics and metal industries as well as the food sector in particular have benefited from this.
Compared to China, however, foreign trade with India is currently still at a very modest level: exports account for less than one percent of total Swiss exports, while the share of imports is slightly above one percent. According to BAK economist Grass, China is currently still around eight times the size of India as a sales market, the EU around 75 times and the USA around 27 times. Exports to Germany alone are still 23 times as high as those to India.
In the Swiss foreign trade statistics for 2022 - the full-year figures for 2023 are not yet known - India does not appear among the 15 most important export nations. The country only just made it into the top 10 in the machinery and electronics industry, where it recorded the highest growth of 18% according to figures from the Federal Office for Customs and Border Security (FOCBS).
Plenty of potential in foreign trade
The potential for expanding foreign trade with India is also considered to be very high. BAK Economics, for example, expects "significantly above-average" economic growth in the coming decades. Even compared to China, GDP growth in India is likely to be around 2 percentage points higher per year over the next 20 years, estimates Grass.
And this growth also brings prosperity, accompanied by increasing purchasing power. Accordingly, India's importance as a sales market is expected to increase significantly.
For KOF economist Reinicke, an FTA with India comes "just at the right time", as the country is developing into a globally important country in pharmaceutical production and has a rapidly growing population, the wealthy part of which could increase demand for Swiss consumer goods such as luxury watches.
In terms of local industries that are likely to benefit, he mentions pharmaceuticals, machinery and precision instruments, for example, which already have high export figures to India. The metal industry in particular is particularly dependent on India for products such as iron, steel, aluminum and even nails.
In any case, the country accounts for almost a fifth of total sales of these products. India is also an important market for finished machines, which account for around 4 percent of total demand.
Also positive for procurement markets
Swissmem, the trade association for the tech industry, also very much welcomes an FTA with India and has correspondingly high expectations. "A free trade agreement is above all a tariff reduction agreement and should facilitate market access," says Jean-Philipp Kohl, Head of Economic Policy at the association.
According to his information, Indian import duties for Swiss companies in the sector are between 8% and 22%, depending on the product group. An FTA would also be very important for all companies in the sector: both for SMEs exporting from Switzerland and for larger companies that already produce locally but need components from Switzerland.
According to the economists, an FTA with India could also have positive effects on the import side, as imports would also tend to become cheaper thanks to the elimination of customs duties. "The country will gain in importance not only as a sales market, but also as a procurement market," says BAK economist Grass with conviction.
As things stand today, Switzerland imports more from India than it exports there - including mainly chemical-pharmaceutical products, metals, machinery, textiles and clothing products. From India's perspective, sectors such as IT services and textiles in particular could gain greater access to the Swiss market, adds Reinicke from KOF.
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