“Switzerland possesses a unique opportunity”

Do you think it will?
Sturm: The political environment suggests that this is the case. The formation of Western and Eastern blocs is increasing, and President Trump has already started to use high tariffs as both an economic and a political instrument.

Hans Gersbach: Geopolitical tensions – particularly those between the United States and China – will put trade flows as a whole between the emerging blocs, including services, under severe pressure over the coming years.

What would be the worst-case scenario?
Gersbach: The biggest risk is an escalation of the trade conflict between the US and China. This would have a hugely negative impact on China and the US themselves, but also on European countries, including Switzerland, if they were no longer able to trade freely with these two major partners. The loss of prosperity would be far greater than it was during the global financial crisis of 2008/2009 or the Covid pandemic because it would be more permanent.

A throwback to the days of the Cold War, so to speak?
Gersbach: We actually call this extreme scenario ‘Cold War 2.0’: the risk that China and the Western world could split into separate spheres and that – as was the case back then – trade between these spheres would no longer be possible (or only to a limited extent).

Is this a realistic scenario?
Sturm: There is such a risk, but we think it is fairly unlikely. I always use my mobile phone as an example in lectures on this topic. Imagine if there was no longer any trade between China and the US. Then this device would not exist. That is almost unimaginable and could not happen overnight.

The KOF Swiss Economic Institute has developed a trade model that you can use to calculate what a trade war would cost us. How great would the harm to Switzerland be in concrete terms?
Gersbach: Let’s not assume the worst-case scenario of ‘Cold War 2.0’ and, instead, let’s extrapolate from the ongoing trade conflict with Canada, Mexico and China and the sectoral tariffs, which we are constantly monitoring and commenting on. Let’s take a scenario that President Trump mentioned during the election campaign as an example, namely that the US imposes tariffs of 60 per cent on China and 20 per cent on the rest of the world. We call this the 60/20 scenario. We have calculated that, in this case, Switzerland would be hit the hardest of all European countries.

Why?
Sturm: The US is hugely important for our economy. It is now our largest trading partner, ahead of even Germany – only the EU as a whole is more important to us. So if Trump now imposes tariffs, this will have consequences for Switzerland.

What does that mean in numbers?
Gersbach: If we focus only on the trade impacts – and disregard potential second-round effects – we expect the volume of trade with the US to fall by between 15 and 20 per cent. Our gross domestic product would grow by between 0.2 and 0.3 percentage points less.

Between 0.2 and 0.3 percentage points less growth does not sound particularly dramatic to the uninitiated.
Sturm: The world would not end! For us as economists, however, these are significant effects. Our economy would still grow, but at a much slower rate than before. Viewed cumulatively over a decade, these are large sums we are talking about. Our current potential growth rate is 1.6 per cent, meaning that we can probably expand our output by that much. In the 60/20 scenario mentioned above, our potential growth drops to 1.5 per cent. That equates to between 10 and 15 per cent less growth!

Which sectors would suffer?
Sturm: American import tariffs would affect all key export sectors, such as manufacturers of machinery, precision instruments, watches and food. However, the pharmaceutical industry would be hit the hardest. That would be disastrous for Switzerland. It is our strongest growth engine, having grown by an average of around 10 per cent per year over the last two decades. And many of our pharmaceutical exports go to the US.

Gersbach: The chemical and pharmaceutical sector is by far the most important export industry for the Swiss economy. It accounts for around half of our export volume, if you exclude trade in valuables such as gold, and is already generating around 7 per cent of gross domestic product this year. Switzerland is particularly vulnerable in this respect. The Biosecure Act, for example, which the US is planning to introduce, would ban certain Chinese suppliers to Swiss pharmaceutical companies if the latter wanted to operate in the United States. It is still unclear whether and, if so, when this law will come into force, but it shows the potential risks facing third countries in the geopolitical dispute between China and the US. 

Sturm: We should also not forget that we have to deal with major structural challenges at the same time, regardless of any geopolitical upheavals.

What are these challenges?
Sturm: The four Ds – the key questions of our time. Demographics: society is ageing and the working population is shrinking. Decarbonisation: the current environmental situation means that we need to find alternative production processes. Digital: this is already having a major impact on our working practices, and artificial intelligence will only intensify this trend. And deglobalisation, which we have already discussed.

What do we need to do to adapt to these new circumstances?
Sturm: If Switzerland is good at anything, it’s exactly that: adapting, being flexible and agile. We have been doing this for decades. Switzerland has a flexible economy. This is one of its great strengths and is at least partly due to the Swiss franc.

Gersbach: It is now crucial to swiftly resolve the existing tensions in the area of trade policy. The Swiss government is currently in the process of revising and expanding its free trade agreement with China. At the same time, it needs to address trade policy issues with the Trump administration as quickly as possible. This puts us in an uncomfortable ‘sandwich situation’ and could mean that we get caught up in the US-China conflict. Trump could say: we will only continue to negotiate with you if you don’t talk to the Chinese.

Sturm: But Switzerland also possesses opportunities in this situation. It might be able to position itself better than our neighbours in the EU. The hope is that, as a small player, it will find a way of occupying a unique position between the blocs so that it can continue to trade goods and services with all countries.

Germany is our most important trading partner after the United States. Our neighbouring country is struggling economically. As the saying goes: when Germany coughs, Switzerland gets the flu. Do we need to brace ourselves for tough times ahead?
Sturm: This saying still applies by and large. The German automotive industry, for example, is very important for Swiss suppliers. With the exception of the pharmaceutical sector, Swiss industry is usually very similar to its German counterpart. However, our latest economic surveys suggest that there is some decoupling here: sentiment in German industry continues to deteriorate, while in Switzerland we are seeing a certain amount of stabilisation. It is Switzerland’s great fortune that we have a much more stable domestic economy and, of course, the pharmaceutical industry. That is why we are in a much better overall position than Germany.

What is going wrong in Germany?
Gersbach: There are various factors at play here. The country’s reliance on Russian gas and its rapid phase-out of nuclear power have pushed up electricity and energy prices in the wake of the war against Ukraine, which has primarily affected the basic-materials industry. In addition there have been tough economic conditions for some time, a lack of productivity improvements resulting from digitalisation and the current car industry crisis, the stop-and-go policy adopted by the government, and the political uncertainty caused. All of this has delayed investment decisions or prevented them altogether.

Sturm: It must also be said that Germany was unlucky in terms of global politics. They bet on Russian gas – and then Russia attacked Ukraine. Everyone is wise after the event but, at the time, there were few critical voices warning against relying on Russia.

How could the elections in Germany affect Switzerland?
Gersbach: Mainly positively in almost all scenarios.

Sturm: I hope that the new government can create some clarity and dispel the prevailing uncertainty. We need an environment in which private companies are willing to invest in the future again. This is my biggest concern about Germany: the lack of investment that has persisted for several years.

Which sectors or technologies offer the best opportunities for Switzerland in future?
Gersbach: There is potential in all sectors going forward. When it comes to technology, the focus is naturally on artificial intelligence. Ideally, Switzerland will become a global AI hub. The necessary ecosystem for this is already in place. AI is what we call a general-purpose technology. It will permeate all industries and the whole of society. It has every chance of becoming a key sector in Switzerland.

What will this require?
Gersbach: Switzerland is already well positioned. We have excellent basic research, both at ETH and EPFL as well as at our universities. We have highly-skilled specialists. We have start-ups, and the world’s leading tech companies and providers of AI tools are here. There is sufficient start-up funding – at least for the early stages. In short, the ecosystem is available here. Now we just need to ensure that we regulate AI more leanly than the EU, strike the right balance between risk control/avoidance and AI development and thus give innovators and firms more room to breathe than the EU. Then we will possess a unique opportunity.