U/S HORMATS REVIEWS BILATERAL ECONOMIC RELATIONS \

2010-02-04 17:31:00 10BERN48 Embassy Bern CONFIDENTIAL INFO LOG-00 EEB-00 AF-00 AGRE-00 AID-00 CEA-01 CIAE-00 \ COME-00 CTME-00 INL-00 DODE-00 DOTE-00 PERC-00 PDI-00 \ DHSE-00 EXIM-01 E-00 FAAE-00 VCI-00 FRB-00 H-00 \ TEDE-00 INR-00 IO-00 ITC-01 JUSE-00 LAB-01 L-00 \ VCIE-00 DCP-00 NSAE-00 ISN-00 NSCE-00 OES-00 OMB-00 \ NIMA-00 GIWI-00 MA-00 ISNE-00 DOHS-00 FMPC-00 SP-00 \ IRM-00 SSO-00 SS-00 STR-00 TRSE-00 NCTC-00 BBG-00 \ R-00 EPAE-00 IIP-00 DRL-00 G-00 SAS-00 FA-00 \ PESU-00 SEEE-00 SANA-00 /004W\ \ R 041731Z FEB 10\ FM AMEMBASSY BERN\ TO SECSTATE WASHDC 6294\ C O N F I D E N T I A L BERN 000048 \ \ \ E.O. 12958: DECL: 12/31/2025 \ TAGS: ECON EFIN ETRD SZ SUBJECT: U/S HORMATS REVIEWS BILATERAL ECONOMIC RELATIONS \ WITH SWISS ECONOMICS MINISTRY OFFICIALS \ \ Classified By: Pol/Econ couns. R. Rorvig for reasons 1.4(b) and (d). \ \ \ ¶1. (U) January 25 at 11:00 am; Zurich \ \ ¶2. (U) Participants: \ \ U.S. \ \ U/S Robert Hormats, Under Secretary for Economic, Energy, and \ Agricultural Affairs \ Amb. Donald Beyer, US Ambassador to Switzerland \ Alex Whittington, Special Assistant to the Under Secretary \ Richard Rorvig, Bern Embassy notetaker \ \ Switzerland \ \ S/S Jean-Daniel Gerber, State Secretary, Swiss Department of \ Economics \ Amb. Monika Ruehl Burzi, Ambassador, Swiss Department of \ Economics \ Dr. Philippe Nell, Director of the America's Office, Swiss \ Department of Economics \ Remigi Winzap, Director of the WTO and Procurement Office, \ Swiss Department \ Josef Renggli, Director of the Financial Affairs Office, \ Swiss Department of Foreign Affairs \ Guido Barsuglia Deputy Director of the America's Office, \ Swiss Department of Foreign Affairs \ \ \ -------------- \ Summary \ -------------- \ \ ¶1. (C) Swiss State Secretary Jean-Daniel Gerber told U/S \ Hormats on January 25 that a recent Swiss Administrative \ court ruling had created complications for implementation of \ the 2009 US-Swiss Agreement on Exchange of Tax Information. \ Gerber said Switzerland will do its utmost to honor the \ agreement, though this - in his opinion - might now require \ submitting an adapted Agreement to the Swiss parliament for \ ratification. Gerber urged the US to be more active in the \ Doha round, saying that progress there would undermine \ domestic Swiss opposition to agricultural trade \ liberalization. This would improve the odds for an \ agricultural Free Trade Agreement (FTA) with the EU, a top \ Swiss priority. Switzerland also hopes to negotiate an FTA \ with China and will start a feasibility study on the issue. \ Swiss firms have huge intellectual property rights (IPR) \ problems with China, and the Swiss hope to get more \ protection from a new FTA. Switzerland decided not to join \ the EU/US WTO IPR panel against China, due to Chinese threats \ to break off talks if the Swiss went that route. U/S Hormats \ said there is a systematic assault on intellectual property \ rights occurring in China, and he urged the Swiss to be tough \ in the negotiations. \ \ ¶2. (C) Gerber asked the US to consider broadening G-20 \ membership to include Switzerland, which he said is more \ qualified based on economic criteria than some members. If \ this is not possible, then perhaps Switzerland might be \ allowed to take part in G-20 working groups where it has \ "something special to offer." Concerning the potential \ reduction of IMF and IBRD board seats and the current \ European over-representation, Switzerland wants to underline \ that it is not a member of the EU or the Euro zone. If a \ Swiss seat is cut, Gerber added, then European representation \ will be even more 'EU' and less 'European.' With regard to \ the US-Swiss discussion of economic issues in the Joint \ Economic Committee, both sides affirmed interest in \ continuing the dialogue. \ \ -------------- \ Financial and Tax Issues \ -------------- \ \ ¶3. (C) Gerber noted that a recent Swiss Administrative Court \ ruling (siding with several UBS account-holders seeking to \ prevent their UBS account data from being transferred to the \ IRS) had caused complications for the implementation of the \ 2009 US-Swiss Agreement on Exchange of Tax Information under \ the existing US-Swiss Double Taxation Agreement. The Swiss \ Government disagrees with the Court's opinion, but is \ compelled to live with it. The Administrative Court is the \ highest authority on administrative matters in Switzerland, \ so its decisions cannot be appealed. Nonetheless, the Swiss \ Government will do its utmost to honor the Agreement reached \ with the US on the UBS case. Gerber said that the Agreement \ requires Switzerland to fulfill its obligations by August 20, \ 2010, but contains a clause allowing the US to take \ offsetting actions should the balance of benefits be \ disturbed. \ \ ¶4. (C) The Swiss cabinet will meet shortly to decide on a \ course of action. In Gerber's view there are three potential \ ways to address the issue: \ \ -- The Swiss cabinet resorts to its emergency law-making \ authority (Notrecht),which allows it to circumvent \ parliament and Switzerland's public referendum process when \ vital national interests are at stake. Gerber said use of \ this provision is unlikely, as these powers were conceived \ for wartime emergencies. \ \ -- Negotiations with the US restart, in part to verify \ whether the number of voluntary disclosures by UBS's American \ account-holders has reached the level of 10,000 filings \ needed to satisfy the agreement. \ \ -- The Government submits an adapted US-Swiss tax information \ exchange agreement to Parliament for ratification, thus \ superseding existing banking privacy laws. This will mean \ pushing an agreement through parliament and potentially \ through a national referendum challenge. In Gerber's \ opinion, this is the most likely action. \ \ ¶5. (C) Gerber said that some parties in parliament oppose an \ information-sharing agreement, while others are supportive. \ Furthermore, Switzerland has negotiated twelve such \ agreements with various countries, all intended to bring \ Switzerland in line with OECD banking transparency \ requirements. These agreements are essentially identical and \ the Administrative Court's decision also creates the same \ problem for all of them and the same need for a legislative \ solution. \ \ ¶6. (C) U/S Hormats told Gerber that the US Department of \ Justice is studying the Swiss Administrative Court ruling \ closely. The US has chosen to avoid saying anything \ publicly, since the US does not want comments from Washington \ complicating the achievement of a solution in Switzerland. \ The US is familiar with the concept of an independent \ judiciary and respects it. The US ratification process for \ the Agreement is going forward. The Senate's calendar is \ full and the US-Swiss Agreement is one of several such \ accords the Secretary hopes can be ratified before the end of \ ¶2010. The Ambassador noted that 14,700 persons from all \ countries had come forward under the IRS voluntary disclosure \ program. Of the 4,000 cases so far developed, about half are \ from UBS. \ \ -------------- \ Trade and WTO Issues \ -------------- \ \ ¶7. (C) Gerber said that successful conclusion of the WTO's \ Doha round remains paramount for Switzerland. As a major \ trading nation and financial center, Switzerland is dependent \ on world markets and free trade. The Swiss Government would \ like to negotiate an agricultural free trade agreement with \ the EU. The proposal faces significant opposition from some \ elements within Switzerland. While a Swiss-EU agreement \ could be challenged by a domestic referendum, a successful \ Doha Round would increase the outside pressure for trade \ liberalization and be helpful to the internal Swiss political \ debate. Swiss WTO office director Winzap noted that the Doha \ round could reduce emerging market tariffs by up to 70 \ percent on average. Gerber said that Switzerland very much \ wants the US to push for restarting negotiations and would \ like to see a more active US stance. U/S Hormats reported \ that the Obama Administration, including USTR Kirk, support \ the successful conclusion of the Doha Round. However, the \ Administration will not be able to sign on to any agreement \ without more flexibility from countries such as India, China \ and Brazil. U/S Hormats dismissed Swiss concerns that Doha \ technical discussions could not move forward without a \ ministerial meeting. \ \ -------------- \ China \ -------------- \ \ ¶8. (C) Gerber reported that Switzerland will conduct a \ feasibility study for a Free Trade Agreement (FTA) with \ China. (Switzerland already has FTA's with Japan, South \ Korea, Indonesia, Malaysia and Singapore.) Switzerland \ currently has a trade surplus with China, to whom it sells \ machinery, food, and diverse manufactures. Gerber indicated \ that while China originally wanted to start its broad \ European trade liberalization effort with a China-Iceland \ FTA, the financial crisis derailed these plans. China next \ examined the possibility of an FTA with Norway, but was \ uninterested as Norwegian exports are comprised mostly of \ fish, oil and shipping services. Switzerland, on the other \ hand, has a more diversified product range and is "small \ enough not to matter." Gerber reported that Swiss firms \ continue to have huge IPR problems with China, and \ Switzerland hopes to get more IPR protection from a new FTA. \ \ ¶9. (C) U/S Hormats opined that there is a systematic assault \ on intellectual property rights in China. Gerber agreed and \ reported that Switzerland decided not to join the EU/US WTO \ intellectual property rights complaint against China only \ because the Chinese threatened to halt FTA plans if \ Switzerland participated. Instead, Switzerland and China \ agreed to set up a 'dialogue' between Swiss and Chinese IPR \ experts. \ \ -------------- \ Export controls \ -------------- \ \ ¶10. (C) According to Gerber, Switzerland is sensitive to the \ issue of export controls and its firms comply with US \ regulations. Switzerland is the world's fourth-largest \ exporter of dual-use goods, and was recently elected chairman \ of the Wassenaar Arrangement, which controls such items. \ Gerber urged the US to contact the Swiss Government should \ any export control issues arise. Gerber understands that the \ USG is in the process of reviewing its export control regime \ and would like any updates going forward. \ \ -------------- \ G-20, IMF, IBRD \ -------------- \ \ ¶11. (C) Switzerland, according to Gerber, believes it is \ more qualified to be in the G-20 than some current members. \ It is the seventh-largest financial market in the world with \ a monetary policy closer to that of the Fed than the European \ Central Bank. Gerber expressed concern that the G-20 is \ tasking international organizations of which Switzerland is a \ member, to undertake G-20 projects, but not allowing \ Switzerland a chance to comment. Gerber singled out the OECD \ in particular. Switzerland still prefers, however, that the \ G-20 involve international organizations with a broader \ membership base than see non-G-20 states excluded entirely. \ If Switzerland cannot be a G-20 member, Gerber continued, \ then perhaps it can participate in G-20 working groups on \ particular subjects, where it has "something special to \ contribute." In addition, Switzerland remains concerned \ about the possible reduction of board seats at the IMF and \ World Bank. Gerber reminded the Under Secretary that while \ the EU is over-represented in the G-20 and on the IMF and \ World Bank boards, Switzerland is not an EU member. Swiss \ President Leuthard reportedly feels very strongly about these \ matters and the Government of Switzerland hopes the US will \ take the Swiss point of view into account. \ \ -------------- \ International Financial Regulation \ -------------- \ \ ¶12. (C) Gerber was surprised that the global financial crisis \ had so far led to very little trade protectionism. There \ have been around 400 mostly small-scale, trade-restricting \ measures implemented since the onset of the crisis. Russia \ is by far the biggest offender. Gerber believes that the \ status of global finance has declined markedly. For many, \ "offshore banking has become a dirty word." Gerber reported \ that the Swiss fear that the OECD goal of free capital \ movement has been forgotten. Gerber said it is difficult for \ Swiss banks to offer financial services in the US or Germany \ without having a subsidiary in those countries. Switzerland \ is concerned by some of the new legislation being considered \ by Congress. One bill, for example, would limit \ deductibility of re-insurance expenses paid to entities \ abroad. The qualified intermediary system works well, but \ many smaller Swiss banks think the cost of compliance and US \ regulatory filings is too high. However, even small Swiss \ banks cannot work only within the domestic Swiss market. \ \ ¶13. (C) With regard to the financial responsibility fee, \ Switzerland also faces a different situation than the US. \ The Swiss National Bank's purchase of 60 billion CHF (USD \ 58.5 billion) of bad assets from UBS has so far turned out to \ be profitable. The Swiss Government had made 1.2 billion CHF \ (USD 1.14 billion) on its sales, and reduced the outstanding \ balance to 29 billion CHF (USD 27.5 billion). Furthermore, \ The Swiss National Bank has increased reserve requirements \ for Swiss banks to levels higher than their foreign \ competitors. It has also lowered the allowable leverage \ ratios to third parties. Introduction of a financial \ responsibly fee on top of these measures would "overload the \ situation." \ \ -------------- -------------- \ Joint Economic Committee and the Trade and Investment Forum \ -------------- -------------- \ \ ¶14. (C) Turning to the Joint Economic Committee (JEC) Gerber \ believes that the forum has been used to provide an overview \ of all economic matters and advance some particular issues, \ such as some particular export control cases. The US has many \ opportunities to talk to the EU about economic matters, he \ continued, but the case is different with Switzerland. U/S \ Hormats and State secretary Gerber pledged to identify a time \ that works for both sides to hold the next JEC meeting in \ Washington, possibly on the margins of the Spring IMF/IBRD \ meetings. With regard to the Trade and Investment Forum, \ which had been set up after the failure of our FTA \ negotiations, Gerber said both governments can do better. \ Switzerland is interested in global issues and President \ Leuthard has a few ideas for USTR Kirk on how to develop the \ Forum. U/S Hormats said that the US is interested in \ Switzerland's ideas of how to invigorate the agreement, \ noting the US is increasingly focused on labor and \ environmental standards. \ \ \ ¶15. (U) This cable has been cleared by U/S Hormats. \ \ \ BEYER \