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Cablegate: U/S Hormats Reviews Bilateral Economic Relations

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

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\
C O N F I D E N T I A L BERN 000048 \
E.O. 12958: DECL: 12/31/2025 \
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. \

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