Being so closely linked to the economies of western Europe and the United States, Switzerland has not been able to escape recent slowdowns experienced in these countries. During most of the 1990s, the Swiss economy was western Europe's weakest, with annual GDP growth averaging 0% between 1991 and 1997. Beginning in late 1997, the economy steadily gained momentum until peaking in 2000 with 3% growth in real terms. But in 2001 the rate of growth dropped to 0.9%, and in 2002 and 2003 the economy virtually stagnated with real GDP up by only 0.1%. The Swiss Economic Ministry had said that both the lack of an upturn in the global economy -- particularly in the Euro zone -- and the still rather firm Swiss franc would continue to hold back the Swiss economy in 2003. Economic performance in 2004 was better than expected thanks to eastern and Asian export markets, and GDP increased by 1.7%. 2005 economic forecasts bet on a 0.9 to 1.6% GDP growth, but structural problems remain the same. The lack of internal economic reforms and a moribund Eurozone economy will once again prevent Switzerland from achieving the much needed 3% growth target.

In 2005, the dollar/Swiss franc exchange rate continued to be shaped by geopolitical tensions. The dollar depreciated further against the Swiss franc from SF 1.49 in October 2002 to SF 1.31 in 2003, and 1.28 in June 2005. The strengthening of the Euro, however, helped Switzerland to minimize the pressure from a weakening dollar. The Swiss National Bank lowered its interest rates to near zero in March 2002 to make the Swiss franc unattractive to foreign investors, and make borrowings cheaper.

The number of bankruptcies in Switzerland during 2004 reached an alarming rate unseen since 1996, numbering 10,500 companies -- 7.4 % more than in 2003. Bankruptcies have been on the rise for the past four years, but the 2004 increase was especially steep. Most cantons recorded an increase in bankruptcies -- Zurich, Basel, Neuch’tel, Geneva and Vaud were hardest hit, while life was better for businesses in Lucerne and St Gallen. Creditors were left facing losses worth $3.87 billion, up almost a third. Given the sluggish economic outlook in Europe, the Swiss Statistics Office believes the upward trend in bankruptcies, both in franc and absolute terms, is likely to continue.

The recent economic slowdown has had a noticeable impact on the labor market. Unemployment increased from 2.6% in 2002 to 4.1% in December 2003, but has since dropped to 3.7%. Among the hardest hit are job seekers between 15-25 with a rate of 4.5%, and hotel and restaurant industry workers with 10.4%. The average number of days devoted to finding a new job increased from 155 to 178 days. One-fourth of the country's full-time workers are unionized. In general, labor/management relations are good, mostly characterized by a willingness on both sides to settle disputes by negotiations rather than by labor action. About 600 collective bargaining agreements exist today in Switzerland and are regularly renewed without major problems. However, the mood is changing. The massive layoffs that resulted from both the global economic slowdown and major management scandals have strained the traditional Swiss "labor peace." Swiss trade unions encouraged strikes against several companies, including the national airline SWISS, Coca-Cola, and Orange (the French telecom operator), but total days lost to strikes remain among the lowest in the OECD. Uncertainties concerning under-funded pension funds, and the prospect of a potential hike in the retirement age have stirred further street protests.

Switzerland's machinery, metals, electronics, and chemicals sectors are world-renowned for precision and quality. Together they account for well over half of Swiss export revenues. In agriculture, Switzerland is about 60% self-sufficient. Only 7.5% of the remaining imports originated from the U.S. Swiss farmers are one of the most highly protected and subsidized producer group in the world. OECD estimates show that Switzerland is subsidizing more than 70% of its agriculture, compared to 35% in the EU. According to the "2007 Agricultural Program" recently adopted by the Swiss Parliament, subsidies will increase by SF 63 million, thus totaling SF 14.092 billion from 2004 to 2007. Mill quotas, however, will be abolished starting in 2009.

Tourism, banking, engineering, and insurance are significant sectors of the economy and heavily influence the country's economic policies. Swiss trading companies have unique marketing expertise in many parts of the world, including eastern Europe, the Far East, Africa, and the Middle East. Not only does Switzerland have a highly developed tourism infrastructure (making it a good market for tourism-related equipment and services), the Swiss also are intrepid travelers. Per capita, more Swiss visit the United States every year than from any other country. Tourism is the most important U.S. export to Switzerland (earning almost $1.5 billion). In 2004, more than 285,000 Swiss came to the United States as tourists.

The Swiss economy earns roughly half of its corporate earnings from the export industry, and 62% of Swiss exports are destined for the EU market. The EU is Switzerland's largest trading partner, and economic and trade barriers between them are minimal. In the wake of the Swiss voters' rejection of the European Economic Area Agreement in 1992, the Swiss Government set its sights on negotiating bilateral sectoral agreements with the EU. After more than 4 years of negotiations, an agreement covering seven sectors (research, public procurement, technical barriers to trade, agriculture, civil aviation, land transport, and the free movement of persons) was achieved at the end of 1998. Parliament officially endorsed the so-called "Bilaterals I" in 1999, and the Swiss people approved them in a referendum in May 2000. The agreements, which had to be ratified by the European Parliament as well as legislatures in all 15 EU member states, entered into force on June 1, 2002. Switzerland has so far attempted to mitigate possible adverse effects of nonmembership by conforming many of its regulations, standards, and practices to EU directives and norms. Full access to the Swiss market for the original 15 EU member states entered into force in June 2004, ending as a result the ìnational preferenceî. However, the Swiss will hold a referendum on September 25, 2005 to extend the provisions of Bilaterals I to the new eastern EU member states. A failure to do so is likely to be considered by the EU commission as discrimination against the new EU member states. Using the so-called ìguillotine clauseî linking all seven agreements together, the EU could revoke the whole Bilateral I package altogether, thus inflicting severe damage on the Swiss economy.

The Swiss Government embarked in July 2001 on a second round of bilateral negotiations with the EU known as ìBilaterals IIî. Talks focused on customs fraud, environment, statistics, trade in processed agricultural goods, media, the taxation of savings and police/judicial cooperation (dubbed the Schengen-Dublin accords). Amid a fierce political debate over the essence of Swiss-EU relations and populist warnings against EU workers and criminals entering Switzerland, the Schengen-Dublin package was approved on June 5, 2005 by a narrow referendum of 54.6%. Fears of cheap labor coming from new EU member states have prompted the government to provide for tripartite surveillance committees to ensure that decent wages are enforced. Experts believe the September 25, 2005 referendum will be either narrowly accepted, or worse defeated, leaving Switzerland open to unilateral EU economic retaliation.

As part of the bilateral agreement on the taxation of savings signed in June 2003, Swiss banks will levy a withholding tax on EU citizens' savings income. The tax, starting on July 1, 2005, will increase gradually to 35% by 2011, with 75% of the funds being transferred to the EU.

The Swiss federal government remains deeply divided over EU membership as its long-term goal, and in a March 2001 referendum more than 70% of the voters rejected rapid steps toward EU membership. The issue of EU membership is, therefore, likely to be shelved for several years, if not a decade. In May 2005, the government said it could sign a framework agreement with the European Union, as an alternative to joining the organization, to encourage dialogue and create a platform for closer cooperation. But in parallel, the cabinet reaffirmed its wish to strengthen ties with other non-EU trading partners in Asia and America. Exploratory talks are currently underway to assess the benefits of a U.S.-Swiss Free Trade Agreement, which would be the first ever signed between the United States and a European country.

Switzerland ranks 18th among the main trading partners of the U.S. worldwide. The United States is the second-largest importer (11.5%) of Swiss goods after Germany (20%). The U.S. exports more to Switzerland each year than to all the countries of the former Soviet Union and Eastern Europe combined, and Switzerland imports more U.S. products and services than does Spain. In addition, the United States is the largest foreign investor in Switzerland, and conversely, the primary destination of Swiss foreign investment. It is estimated that 200,000 American jobs depend on Swiss foreign investments. Total U.S.-Swiss bilateral trade increased from $15.33 billion during 2003 to $16 billion in 2004.