EFTA deal and the Swiss challenge
TRADE VIGIL. India should watch out for a reset in SwitzerlandEU ties and Switzerland’s FTA with China After Switzerland pulled out of trade talks with EU it has shared a testy relationship with the bloc. But the recent reset in ties could impact Indian
The IndiaEFTA TEPA deal has been signed, but will be implemented only after ratification by all five members. Post implementation, a couple of external factors need careful attention.
Switzerland, which is undoubtedly the largest partner in the bloc, has a thriving FTA with China. In January 2024, the two partners signed an agreement to deepen and upgrade their trade relationship. Iceland, also an EFTA member, is the only other country not in China’s immediate neighbourhood, to have an FTA with China. India has been quite reticent about any trade agreement with China.
Would Chinese goods find easy preferential entry into India via the Swiss? India seems to battle influx on Chinese goods through the ASEAN FTA route, despite tight Rules of Origin clauses. Would India now face a similar situation visàvis Iceland and Switzerland too? While rules of origin do exist, there are worries over whether these can be circumvented. This issue requires some consideration.
Secondly, the SwissEU relationship is undergoing a fundamental reset, after a period of turbulence. In 2014 the two sides commenced bilateral negotiations for an Institutional Framework Agreement (IFA) to update the old agreements, at EU’s insistence, since these agreements had become obsolete. After a prolonged seven years of negotiations the Swiss unilaterally terminated the negotiations on May 26, 2021.
Consequently, on the same day DirectorGeneral, Health, EU declared that the existing mutual recognition agreements (MRAs) with the Swiss had ceased to apply. Among other problems, the Swiss medical devices exports to EU estimated at over €5.5 billion annually, suddenly lost duty free, smooth access to EU. Swiss manufacturers, now equivalent to any third country manufacturers, need their products certified by conformity assessment bodies established in the EU.
Although legal experts called out the EU action as illegal, in violation of EU law and the WTO Rules, the situation continues today with Swiss medical devices exports having the status of a nonassociated third country. European Parliament’s recent report of July 25, 2023, on SwissEU relations unsubtly states in para 26 that that this could also possibly apply in the future for mechanical engineering, machinery, construction products and artificial intelligence. The report squarely lays the responsibility of this barrier to Swiss exports at the nonrenewal of the 2002 MRA.
From the EU’s perspective, it is extremely important to keep its flock of all 27 members as well as the EEA members together and in line. EU’s recurring regulatory measures call for effective and efficient implementation. EU cannot afford to allow any member to access its market and other programmes freely without abiding by its rules. It has, therefore, given even the Swiss some harsh treatment.
To further assert their position the EU Commission on June 17, 2021, excluded Swiss legal entities from their flagship Horizon 2020 (an research funding programme). Switzerland had received a CHF 2.7 billion in funding under this programme and was at the top of associated countries.
This move by the EU also excluded the Swiss from the European Strategy Forum on Research Infrastructures.
COHESION FUND
Another prickly issue was the Swiss strategy of using Cohesion Fund payments to EU as a leverage. The Cohesion Fund has been established to reduce regional and economic disparities within EU. The Fund largely provides support to Eastern and Southern EU countries for projects relating to innovation, research, environment, climate change, competitiveness, inclusion etc.
Switzerland, despite being the largest of the EFTA partners had lagged in payment of cohesion fund contribution. The previous tranche was around CHF 1 billion in 2012.
In 2019, the Swiss Parliament blocked the 2nd tranche of CHF 1.302 billion, stating that it was to be released only if EU adopted a nondiscriminatory stance visàvis Switzerland. This was a reflection of the EU being unable to accommodate Swiss concerns in the IFA being negotiated at that time.
Subsequently, the same was released on September 30, 2021. The other three EFTA countries have paid a massive €2.8 billion from 20142021 to the EU for its Cohesion Fund. They continue to contribute. India will have to be vigilant about EFTA investment commitments on this background. Given that the Swiss need strong EU pressure to pay up its cohesion fund commitments, will they also need some prodding from Indian side?
The Swiss desire to remain an ‘independent’ entity and its confidence that it could do so was apparent since the 1992 Swiss referendum. Swiss people rejected the idea of a membership of the EEA. Interestingly the other three members of EFTA — Iceland, Lichtenstein and Norway belong to the EEA. The Swiss deliberately chose to remain as independent as possible from EU although EU is by far their single largest trading partner. Interestingly, in its Foreign Economic Policy report of January 2024, the Swiss Federal Council has lauded India’s ability to straddle relationships with partners of all hues. ‘India pursues an interestsdriven policy of maintaining good economic relations with all actors in an increasingly polarised world’, it observes.
SWISS DILEMMA
However, the Swiss urge for an independent global position may be subjugated by its market access priorities since Switzerland is again back to prioritising its relationship with EU.
The two sides recommenced exploratory talks in March 2022 for a broad bilateral package. The resulting SwissEU Common Understanding of October 2023 calls for a ‘dynamic alignment’ between Swiss and EU Regulation, with Swiss hoping for decisionshaping access to EU’s regulatory processes.
If this happens, India may expect the same regulatory hurdles in the EFTA market that it faces in the EU, sooner rather than later. Will Switzerland/EFTA then also adopt CBAM, deforestation and other upcoming EU measures? Or will it support its FTA partners in obtaining concessions? The former is more likely, going by EU’s past actions. Again, awareness and vigilance from the Indian side would reap good outcomes.