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Trends in Location Promotion - From Carrot to Stick

China and the United States have taken the lead, and the EU is quick to follow: The big markets are increasingly relying on leverage in their dealings with international companies. This is not good news for a small, easily harassed country like Switzerland.

At the World Economic Forum in Davos, the closing speech of the world's most powerful man in front of the assembled business elite had been expected with considerable excitement – and then: a fifteen-minute monotonous commercial for the US as an investment and business location.

Two statements stood out: "America first does not mean America alone" and "America is open for business, and we are competitive once again". Tax cuts, deregulation, affordable and reliable energy, best research institutes, innovation, entrepreneurship and, yes, even free, fair trade – all the boxes were ticked for a good location promotion flyer. Decision-makers in business and politics are well advised, however, not to let themselves be placated by the lullaby recited in Davos.

International Turnaround
Not 72 hours before his speech in Davos, Donald Trump, at the request of his trade experts, approved new protective tariffs on the import of washing machines and solar panels. Although these measures are directed mainly at companies from China and South Korea, they apply to imports from all over the world. The tax on foreign washing machines may now be as high as 50 percent. When these tariffs were first announced last year, affected companies reacted by stating their intention to expand US production. This is only the latest example of a trend reversal in location promotion that has been observed not only in the US. In the global competition of international companies for capital and jobs, over the past two decades politicians from Western countries have been relying heavily on incentives to try and attract foreign companies, including free market access, low taxes, investment support programs, low-regulation industrial parks, patent boxes, and many other measures.

The winners of this development were small, open, high-tech economies with a high level of education. Thanks to freer trade, they were able to make up for their biggest disadvantage, the smallness of their markets, and play to their strengths. One example of where this could be seen the Economist's "where-to-born index". This index inspired by Warren Buffett shows the countries in which people are most likely to live a healthy, safe, and commercially successful life. Among the top five in 2013, its most recent edition, are four of these small, competitive economies: Switzerland, Norway, Sweden, and Denmark. They replace the big Western markets that headed the same ranking in 1988, the US, France, Germany, Italy, Canada, and Japan.

"Made in China" and "America First"
In recent years, however, there has been a growing backlash: While global trade agreements to facilitate trade involving WTO members have been blocked for some time, multilateral and bilateral agreements are now also coming under increasing pressure. Protectionist measures are on the rise, which has led to an increase in non-tariff barriers to trade: State regulations are expanding, protective tariffs increasing, and public tenders being required to include a larger share of domestic production. This forces companies to maintain and expand their presence in the respective markets.

Large economies are becoming better at taking advantage of the value of their big markets, putting pressure on companies to create jobs locally. China with its "Made in China 2025" program and the US with its "America first" policy, and a president threatening car manufacturers with protective tariffs, are the most prominent examples of this trend. According to Unctad and Global Trade Alert, the EU has introduced more protectionist measures as well, especially in the wake of the Eurozone crisis. In other words, the big markets have begun to substitute the carrot for the stick in their dealings with international companies.

For Switzerland, this is not good news. Although it is in the top 10, frequently even the top three in all areas of the latest Global Competitiveness Report, it is only 39th in terms of market size. This also becomes apparent in the negotiations for a framework agreement with the EU, in which Brussels is able to set the premium for this market access. The Federal Council must consider how Switzerland as a location can be safeguarded if investment is increasingly geared towards power rather than competition. After all, the Swiss are a peace-loving people and better at wielding carrots than sticks.

(This article was published in the NZZ)