Protecting the Swiss milk market from foreign price shocks: Public border protection vs. quality differentiation: HILLEN and VON CRAMON-TAUBADEL

Switzerland applies a number of different border protection policies for milk products. While dairy products such as butter and milk powder are still subject to tariffs and tariff‐rate quotas, cheese trade with the European Union (EU) is fully liberalized. To understand how such different levels of protection affect spatial price transmission, we analyze price transmission between Germany and Switzerland for several products at the wholesale level, and for raw milk producer prices. We find that not the level of border protection determines the degree and speed of 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, 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 protection via tariffs. [EconLit classifications: Q11, Q13, Q18].