RUNNING HEAD: SWITZERLAND AND COMPARITIVE Switzerland and Comparative Advantage; Factors, Specialization and Protectionism in a Global Economy ECO GM/ 561 International Economics Douglas Gurney July 3, 2010 Switzerland and the Concept of Comparative Advantage While most in today’s hyper-competitive global economy look towards countries including; China, India, Taiwan, Vietnam, and others in search of lower production costs seeking the ever illusive comparative advantage, others have different ideas.
Switzerland, a tiny land locked nation in central Europe surrounded by Alps with a relatively small population of 7,630,605 is one such country. It operates with its own comparative advantage in the industries of chemical/Pharmaceuticals’ production and export, watch making, chocolate manufacturing, and a strong financial sector. While Switzerland has recognized most of its potential in these areas, one area that of corporate taxation still remains undeveloped. Comparative Advantage; the Concept and Identifying Factors
As a general rule, comparative advantage is defined as “the principle of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party…” (Investorpedia. com, 2010) Only after all the components of comparative advantage are completely understood is it clear how countries like those of Switzerland compete in today’s market. The Concept of Comparative Advantage In economics, the principle of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party…the advantage a nation has by being able to produce products or services more efficiently and at lower cost than a competitor nation… A situation in which a country, individual, company or region can produce a good at a lower opportunity cost than a competitor. ” (Investorpedia. om, 2010) To understand how a country can produce a product, good, or service at a lower opportunity cost, it is essential to understand that opportunity costs are the next best choice given to a person, entity, or country given several mutually exclusive choices. Identifying Factors of Production and/or Technology Switzerland is limited in its geographic location, ability to attain and maintain inexpensive human capital, population growth, and ‘other’ factors which enable a country to compete in the area of inexpensive production.
That being said, the higher education of its citizens, its ability to attracted highly skilled personnel, and the overall quality of its products and research provide a distinctive advantage. While Switzerland itself lists three areas in which the country’s economy is dependant including; agriculture, industry, and services, one of its highest produced exports are chemicals used in the development and use of pharmaceuticals valued at (in millions) $44,846 annually. Information about Switzerland, 2010) A second factor, that of production can be seen in Switzerland’s ability to produce specialty products and services that lend themselves to the country’s ability to maintain a comparative advantage despite higher costs to the consumer. The answer lies within the investment made in its citizenry through education and internships or ‘apprenticeships’.
While other developing nations depend upon a populous with a minimal education and basic skill sets to handle basic assembly or construction needs allowing for inexpensive human capital, Switzerland encourages its work force to seek higher levels of education in the fields of finance, chemistry, and pharmaceuticals. Other industries that remain specialties including confectionaries are also encouraged. Specialization, Opportunities, and Protectionism “Switzerland is one of the countries with the highest contribution of the foreign trade to the gross inland product. (Introduction to Switzerland, 2010) Among its top exports are those of chocolates, chemicals and pharmaceutical products, precision tools, watches, and jewelry. As Switzerland is unable to compete globally in the area of inexpensive goods and services including; toys, manufactured goods, and other products used in mass by today’s consumer it is advised that the nation continue to produce products it currently specializes in along with expanding its current services to attract foreign investment into the Swiss economy.
Industries of Specialization and Opportunity As most already know, the Swiss are renowned for their production of high quality chocolates including those of the Toblerone and Lindt brands. “Switzerland has a comparative advantage in the production of chocolate. By spending one hour producing two pounds of chocolate, it gives up producing one pound of cheese, whereas, if it spends that hour producing cheese, it gives up two pounds of chocolate. Thus, the good in which comparative advantage is held is the good that the country produces most efficiently (chocolate).
Therefore, if given a choice between producing two goods (or services), a country will make the most efficient use of its resources by producing the good with the lowest opportunity cost, the good in which it holds the comparative advantage, and by trading for the other good. ” (Globalization101. org, 2010) While chocolates are one of this country’s specialties it’s not the only one. Other areas of specialty already realized and being readily utilized by the Swiss are the production of high quality and in some instances very expensive watches.
Brands include; Rolex, Citizen, Swatch, Invicta, and Omega just to name a few. The watch industry is yet another example of the use of a highly trained and skilled work force and becomes the primary factor in this country’s comparative advantage over others. The pharmaceutical and financial industries are two of the additional fields dominated by the Swiss globally. As with the watch industry, Switzerland has spent a significant amount of time and resources in the form of capital developing it’s populous into a well educated and highly trained group of individuals thereby maximizing its resources in these industries.
Many throughout the world use the Swiss banking system to handle issues and accounts for the individual, organization, and nations understanding they are guaranteed security and peace of mind. One aspect of this industry which Switzerland has not yet fully explored, however, is that of luring corporations away from their current home countries of operations and moving those operations to Switzerland as a source of additional revenue through the country’s lower corporate tax rates. Due to the federal structure of Switzerland there is no centralized tax system, with some taxes being levied exclusively by federal authorities whereas other taxes are concurrently levied at cantonal, communal and federal levels. Although the rate of tax levied at a federal level is consistent, that levied at a cantonal level varies from canton to canton…Because significant differences presently exist in the rates of taxes levied at cantonal level the choice of canton is an important element in all tax planning…The tax rate for companies in Zug ranges from 14% to 17% (at the time of writing). ” (Lowtax. et, 2010) It would be highly advisable that the federal government as a whole launch an intensive marketing campaign to attract foreign entities as there is an apparent comparative advantage in this untapped sector of business and finance. Protectionism “Switzerland has liberal trade and investment policies and a conservative fiscal policy. The Swiss legal system is highly developed, commercial law is well defined, and solid laws and policies protect investments. The Swiss franc is one of the world’s soundest currencies, and the country is known for its high standard of banking and financial services. (Historycentral. com, 2010) Over the past few decades, Switzerland has suffered economically from a liberalization of its trade laws that protect the business sectors of agriculture, industry, and services including the pharmaceuticals, watch manufacturing, and financial sectors. Currently, Switzerland along with a host of other nations are taking proactive measures in an effort to protect industries that are a main stay of the Swiss economy currently without negatively impacting international relations. Switzerland has acted on various policy fronts – specified in the context of a “revitalization programme” and its recent implementation of the Uruguay Round agreements – …According to a WTO Secretariat report on Switzerland’s trade policies and practices, the “revitalization programme” was motivated mainly by the perceived need, after Swiss voters’ rejected the European Economic Area (EEA), to keep pace with European regulatory developments…While finance and innovative manufacturing industries, including pharmaceuticals and advanced electronics, are performing well, many traditional industries and tourism are experiencing strong adjustment pressures… Among services sectors, the report considers air transport as particularly affected by Switzerland’s non-participation in the EEA. Without EEA carrier status, Swiss importers to invoke intellectual property provisions with a view to shielding exclusive arrangements from “unauthorized” supplies. (WTO, 2010) Aside from trade mark legislation, copyright laws, and traditional business tools and techniques Switzerland primarily relies upon corporate laws and regulation to ensure trade secrets remain in organizations operating within Switzerland and its comparative advantage to ensure those firms remain in the country as well. Summery Switzerland, a small country located in central Europe surrounded by alps with a total population of 7,630,605 maintains its own hold on comparative advantage. Through the use of its highly educated and skilled labor force it continues to exude dominance in the export market being the third largest exporter in the world.
While realizing most of its potential in the services and industry markets of Pharmaceuticals, chemical exports, and chocolate making there is one area which still has untapped potential. For centuries Switzerland has been a financial industry leader, recognized as a leader in finance and banking, it has failed to understand the untapped potential it has to attract foreign businesses as a host nation providing real corporate tax advantages in the form of overall discount tax rates. It would be highly advisable for the nation to launch a major marketing campaign geared towards attracting these major corporations which in turn will generate as of yet untapped revenue for this tiny yet powerful nation. References About. h, (2010) Information about the Economy of Switzerland, http://www. about. ch/economy/index. html, Retrieved; July 5, 2010 Globalization101. Org, (2010) The Theory of Comparative Advantage, http://www. globalization101. org/index. Retrieved; July 5, 2010 LOWTAX. NET, (2010) Switzerland; Domestic Corporate Taxation, http://www. lowtax. net/lowtax/html/jswdctx. htmlRetrieved; July 5, 2010 Investorpedia. com, (2010) Comparative Advantage, http://www. investopedia. com/terms/c/comparativeadvantage. asp, Retrieved; July 3, 2010 World Trade Organization (WTO), (2010) Trade Policy Reviews; Switzerland 1996, http://www. wto. org/english/tratop_e/tpr_e/tp31_e. htm, Retrieved; July 5, 2010