When one thinks of Switzerland, images of mountains, chocolate, cheese and all things nice spring to mind. We also see the country as a champion of human rights and fiercely independent, a country that positions itself as being politically neutral based on individual freedoms and fairness.
This neutrality is showcased by the Swiss not being a member state of the EU nor of NATO.
This is in stark contrast to how the world sees China, particularly as the Belt & Road Initiative (BRI) increases its influence over Asia and Europe. Whilst the world has spent much energy on alleging the BRI uses debt finance to exert and gain control in Asia, many have not paid much attention to the quiet diplomacy that China has embarked on.
First they failed to seriously appreciate Italy’s move towards China and the BRI, and only now are China detractors starting to question Switzerland’s move towards China.
By understanding some of the history of Sino-Swiss relations we realise that the recent MOU signed between the two countries in May should not really come as a surprise. After all, the China/Swiss free trade agreement has been in force since 2014.
Interestingly, this is the only Swiss FTA that does not have a commitment to human rights. Since the signing of the FTA, more than 80 Swiss companies are in Chinese hands. Whilst ownership is predominantly by private Chinese companies, one needs to appreciate that the finance for these deals come from state owned banks. This amount is not insignificant, with Chinese investment since 2014, amounting to over $43.6bn.
Interestingly, these investments are made possible as Switzerland’s policy framework does not have veto rights to prevent takeover of important infrastructure, such as electricity. These veto rights are enshrined in countries such as Australia, Germany and other G7 countries, including the recently signed up Italy.
This is an interesting conundrum, particularly when one considers finance and banking institutions. All banks and finance in China are controlled by state-owned instruments, thereby giving China a powerful entry point to promote the renminbi as an alternative currency to the US dollar. With the Swiss banking reputation and credibility, there is a universally accepted banking system that converts trade between the EU and China into Chinese currency.
In return, Switzerland has received a boost in Chinese tourism that has steadied the decline of the hospitality sector. For example, when the MOU was signed in April 2019, the Chinese arranged a tour group of 12,000 people employed in sales, that added $14m to the Swiss economy. Switzerland’s clean air and pollution free image is a popular selling point to the Chinese market who look to enjoy good, clean and healthy food followed by quality cheese and chocolates. This is particularly profitable as the average Chinese visitor spends on average $378 a day as compared to US visitors who spend on average $280 a day, with German visitors spending a miserly $130 a day.
So how does Switzerland reconcile its strong human rights stance with doing business with China. The Swiss government’s response, unlike that of other western aligned countries, has been to argue that by having constructive engagement with China, they are better placed to effect change. They point to the April 2019 MOU as evidence to support this notion. The recently signed MOU deals with trade, investment and finance for projects in third countries along the BRI.
This has been a thorn in the side for all countries as the financing of projects by China has been seen to promote debt diplomacy and undermine claims of using the finance to lift poverty. The Swiss MOU addresses the sustainability claims around the BRI and forms the basis for China’s recently released policy: ‘Debt Sustainability Framework for Participatory Countries of the Belt Road Initiative”.
This may have a profound impact on supply chain and logistics dynamics along China’s BRI, as participating countries have access to a highly respected financial system that enables financing in a neutral country. Furthermore, it also grants access to independent and internationally accredited dispute resolution mechanism. This would be particularly important for commercial and contract dispute resolution that will inevitably arise along the BRI and in circumstances in which third country participants do not have faith in the Chinese legal system. Both these opportunities may also signal a threat to the likes of Singapore, Hong Kong and Malaysia that have tried to position themselves as neutral service providers to China’s BRI, all of whom carry a form of geo and socio-political baggage when viewed from afar.
In effect the MOU delivers on five key areas and supports the argument that constructive engagement through the BRI can deliver win-win solutions. The question is whether these wins are sustainable.
In summary, the five key areas covered are: Private Capital and Finance; Sustainable Handling of Debt; Consideration of Social Impacts: Environmental Problems; Transparency.
Whilst it looks as if the China / Swiss relationship appears at first glance to be one that is doomed for failure due to contradictory base value systems, it does suggest that China is willing to engage constructively around the BRI. It also suggests that the BRI is for the benefit of all BRI participants and delivers on promises of transparency and economic development. As with all emerging global phenomena, only time will tell.