In a significant turn of events, President Trump has implemented a hefty 39 percent tariff on Swiss exports, which came into effect this week. This decision follows Swiss leader Karin Keller-Sutter's recent visit to Washington in a last-ditch effort to negotiate better terms for the Swiss watch industry. The tariff affects renowned Swiss watch brands such as Rolex, Omega, and Patek Philippe, marking a challenging period for these prestigious labels.
The United States represents the largest export market for the Swiss watch industry, contributing to approximately 17 percent of total exports by value. In the first half of this year, this translated to a staggering 2.6 billion Swiss francs (around $3.2 billion) in exports, significantly outpacing Japan, the industry's second-largest market. For many Swiss watchmakers, this percentage is not just an average; it is critical for their business operations, making the new tariff a substantial blow.
The pressing question following the tariff's implementation is who will ultimately absorb the increased costs. In April, when the initial tariff threat was lowered to 10 percent, brands indicated they would share the financial burden among manufacturers, retailers, and consumers. This resulted in a price increase of 3 to 5 percent on average. However, with the tariff now set at nearly four times that amount, the situation has become more complex. Brands are grappling with whether they can pass these costs onto consumers without further dampening demand.
The Swiss watch industry is currently facing a downturn, with sales figures revealing a troubling trend. Nicholas Hayek Jr., chairman of the Swatch Group, has voiced concerns about the impact of the new tariff, citing an 11.2 percent sales decline in the first half of the year. Renowned brands like Richemont and LVMH are also experiencing similar challenges, raising the specter of further price increases to maintain profitability. If prices rise in the US market, brands may need to adjust prices globally to avoid discrepancies that could lead to cross-market cannibalization.
Recent data from the Federation of the Swiss Watch Industry shows a worrying decline in global demand. In May, the value of Swiss watch exports fell by 9.5 percent, followed by an additional 5.6 percent drop in June. Exports to the US were particularly affected, with a staggering 25.3 percent decrease in May and 17.6 percent in June. These declines are compounded by a rush in April as manufacturers attempted to increase stock before the tariff came into effect.
While President Trump may argue that these reciprocal tariffs are justified, the lack of a substantial American high-end watch manufacturing industry raises questions about their fairness. The imposition of tariffs on Swiss watches may inadvertently harm numerous American businesses that rely on the import of these luxury goods, potentially offsetting any gains from increased import tax revenues. Moreover, a recent agreement allows 99 percent of US goods to enter Switzerland duty-free, highlighting the disparity in trade relations.
Should the current tariff situation persist, it could lead to an increase in interest in the pre-owned watch market, as consumers seek alternatives to newly manufactured Swiss watches. However, this potential shift offers little consolation to watchmakers who are facing significant challenges. The Swiss pharmaceutical industry remains exempt from these tariffs, a fact that has further fueled frustration within the watch sector.
The future of the Swiss watch industry hangs in the balance. Despite Switzerland's diplomatic efforts in Washington, a resolution remains elusive. As the clock continues to tick, many Swiss watch companies face an uncertain path ahead, raising concerns about their long-term viability in the wake of these substantial tariffs.
