When companies close their local production facilities, even liberal politicians forget their Sunday school principles. An episode this week from the Council of States on the controversy over industrial policy provides some insight.
In Sunday school, noble principles are preached, but on weekdays, people pretend to be “flexible.” This is a common phenomenon in life, and therefore also in politics. So it is no surprise when supposedly environmentally conscious politicians suddenly discover their love for energy-intensive steelworks and supposedly liberal minds suddenly demand industrial subsidies.
The Swiss steel industry has suffered in recent years. This is due to, for example, sharply increased energy prices, subsidies abroad that distort competition, and import restrictions in the EU. The problems at the Gerlafingen steelworks inspired Solothurn politicians to make proposals in the federal parliament for state aid measures. A motion by Solothurn SP Council of States member Franziska Roth calls for emergency measures to save the Gerlafingen steelworks – “if necessary with emergency powers.”
According to Roth, Stahl Gerlafingen is “systemically important for Switzerland”. If it were to close, over 500 jobs would be lost and Switzerland would lose its “only plant that closes the relevant metal cycles, produces structural steel and secures the raw materials domestically”. The motion is co-signed by the other Solothurn resident in the Council of States, the Centre Party representative Pirmin Bischof. The proposal was on the agenda for this week in the Council of States.
Concerns also in Lucerne
Another initiative on the same topic was on the agenda this week: a motion by the Lucerne FDP Council of States member Damian Müller, which also calls for help for the steel industry – “to secure Switzerland as a production location and to preserve the circular economy.” The canton of Lucerne is home to the other steelworks in Switzerland (Steeltec in Emmenbrücke).
The text of Müller’s motion names three conceivable forms of aid: support for infrastructure investments, funding for research and development projects on decarbonisation and efficiency improvements, and “short-term support measures to offset competitive disadvantages”. In its response, the Federal Council had reminded that from 2025, by virtue of the Climate Act and the CO2-Act, new subsidy pots are available in the name of climate policy. The steel industry could also benefit from this. In addition, the energy-intensive industries in Switzerland are in a favorable starting position, as they require significantly less energy per franc of added value than their European competitors.
What else would the Federal Council have to do? Damian Müller’s answer: “The Federal Council would have to think ahead and come up with solutions for the worst-case scenario – namely plant closures – as we are in the transformation phase of decarbonization.”
Discomfort in Vaud
The term “systemic relevance” was previously limited to large banks and electricity companies or their power plants. The term meant that a failure would cause extremely high economic costs due to an enormous broad impact. In a paper from May, the State Secretariat for Economic Affairs denied the systemic relevance of Swiss steelworks, since in the event of a failure, other suppliers could be used; there is also global overcapacity in the steel sector. The paper also referred to Switzerland’s lively international trade in both directions. In 2023, Switzerland imported around 350,000 tonnes of steel scrap and exported around 800,000 tonnes.
This week, the Council of States sent the motions mentioned to its responsible committee for examination. However, an intervention by the Vaud FDP Council of States member Pascal Broulis caused a stir. The closure of the last Swiss glass factory by Vetropack in the canton of Vaud, announced in the spring, alarmed local politicians and triggered another motion in the federal parliament. This calls for an “industrial strategy” (read: subsidies). Of course, with special consideration for the glass sector.
Cheeky stuff from the university
This week, Broulis got angry in the Council of States about a trade economist from the University of St. Gallen. The economist had the nerve to publicly say the following: the impact of the closure of Vetropack from the perspective of Switzerland as a whole would be small, and if foreign countries subsidized its industry, the Swiss could benefit from cheaper prices. Broulis found this statement “unbelievable”. The message of the liberal politician loosely translated: the economist in question has no idea about life, domestic industrial production is important, and every reduction is a loss.
The gut feeling of some politicians on trade issues goes something like this: exports are good, imports are bad and the more domestic production, the better. Many trade economists live on another planet. From an economic point of view, exports are not an end in themselves, but a means of financing imports for consumption and further processing. The theory of trade economics first reminds us of the enormous gains in prosperity that arise thanks to trade. Imagine if every household had to produce all the goods it uses itself. The high gains in prosperity arise primarily through specialization and mass production. The same applies to international trade. Switzerland would be much poorer without it.
Economically hardly controversial
But how bad is it when other countries subsidize certain sectors and thus distort competition – should Switzerland then join in the subsidy race? The St. Gallen economist criticized by Broulis may have made politically incorrect statements, but he is not a politician. From an economic point of view, the statements do not seem controversial: foreign industrial subsidies can benefit Switzerland in the form of cheaper imports. Whether the advantages or disadvantages of foreign subsidy programs outweigh the disadvantages from a Swiss perspective is often not clear at first glance.
From an economic perspective, there are at least theoretically valid arguments for sector-specific government crutches. For example, bridging coordination and information problems in the market by giving a state incentive to young industries until a viable ecosystem has been created. But it is doubtful whether in practice the state can direct subsidies to the economically “best” sectors and even identify them in advance. The international research literature on practical experience with state industrial policy does not provide a uniform picture. It is clear that for a relatively small economy like Switzerland, self-sufficiency will always remain an illusion or extremely expensive, and that joining in the subsidy race of the big players is usually not very promising anyway. And if all states subsidize the same industries, overcapacity is inevitable.
The Federal Council remains generally skeptical of sector-specific subsidies, as it stressed in a report on the global subsidy race in May. Two key reasons: foreign experiences are not very encouraging, and when it comes to the distribution of state funds, political influence is often more important than economic efficiency. Switzerland also provides illustrative examples – with its state aid for agriculture and the tourism sector. But in international comparison, Switzerland is more reserved outside of the two sectors mentioned. Broulis from Vaud could look across the border and ask himself whether France has achieved better results with its decades-long industrial policy than Switzerland with its restraint.
Kecker Trade Association
The Swissmem industry association, which represents the machine and metal industry, is against specific subsidies for the steel sector. Even the trade association rejected sector-specific subsidies in the latest edition of its association newspaper in the context of the steel debate. The argument “The others subsidize, so we should too” does not convince the trade association: “Let the other countries subsidize their industries – that way we can import more cheaply.” This is a rather new tone for the trade association. Personnel changes may be one explanation for this.
In May, the Federal Council concluded, based on an external study commissioned on recent subsidy programs in the EU and the USA, that the damage and benefits of these programs for the Swiss economy more or less cancel each other out. However, the damage may be visible and concrete in the short term in the form of (possible) relocation of production. The benefits of not having Switzerland join the race for subsidies are diffuse and widely distributed and therefore not very visible. Politicians are primarily interested in what is visible in the short term – and they want to be seen doing something to prevent damage. Economists can more easily afford to be politically incorrect at their desks.