Protecting the Swiss milk market from foreign price shocks: Public border protection vs. quality differentiation

In Switzerland, a number of different border protection policies are in place for dairy products as a result from stepwise market opening. While dairy products such as butter and milk powder are still subject to tariffs and tariff rate quotas, cheese trade with the EU is fully liberalized. It is not well-understood how such different types and levels of protection affect spatial price transmission for the respective products and the underlying raw milk. Therefore, we analyze price transmission between Germany and Switzerland for several dairy products at the wholesale level, and for raw milk producer prices. We find that not the degree of public border protection and the resulting trade volumes determine the degree and speed of spatial price transmission, but rather the qualitative differentiation of the Swiss products. While prices of tariff-protected dairy products are influenced by German price developments, cheese prices are not. Also at the producer level, raw milk prices for cheese processing are less strongly linked to foreign prices than milk prices for industrial dairy production. Our results suggest that for small high-income countries such as Switzerland, promoting high-quality products and hence reducing international substitutability alleviates international price pressure more than public protectionism via tariffs