With a deadline of this Thursday for a 39% tariff on all Swiss watches entering the United States, industry executives are planning for the worst while hoping for the best.
A last-minute deal that secures a 10% or 15% rate for its largest and most important export market could still be done, and Swiss President Karin Keller-Sutter is on her way to Washington as I write, but the watch industry is not sitting idle.
Watches leaving for America before the Thursday deadline will be taxed at the current 10% tariff rate, so manufacturers are repositioning stock into the US before the 39% rate is triggered.
At the same time, there is still hope for an 11th hour reprieve. After all, President Trump loves a Hollywood ending while Swiss negotiators are reportedly improving their offer and will keep haggling until the clock ticks down to zero — Mission Impossible-style.
We all hope that a deal more in line with the European Union or UK — 15% or 10% — can be reached, because the impact of the additional tariff will be challenging for all-but the strongest brands, as Watches of Switzerland CEO Brian Duffy observed in comments to the Financial Times over the weekend.
The 39% rate is “a shock”, he said, before qualifying that demand in the United States is strong enough for the biggest brands to keep selling.
It is certainly true that Royal Oaks, Aquanauts and GMT Masters will keep selling, almost regardless of how much retail prices rise in the US if the 39% rate hits.
Demand continues to run ahead of supply (although the gap is rapidly closing), so there is significant price elasticity, it is assumed.
But will watch brands pass on the full cost of the 39% tariff to customers and, if so, what would that mean for sticker prices?
When/if the new tariff kicks in, it will be for Swiss watchmakers, their US offices and retail partners to work out whether to absorb the cost or pass it on to consumers.
Tariffs are paid by the American company importing the item. This is typically done by in-country subsidiaries or third-party wholesalers, meaning they will be paying 29% more for every watch they buy compared to the current 10% rate.
Manufacturers in Switzerland could adjust the price they charge for these exports, but that would be an immediate hit to sales revenue and profit; highly undesirable for publicly-traded companies like Swatch Group and Richemont.
The importer could absorb some of the cost, or pass all or some of it onto retailers.
Those retailers could then choose to protect margin by increasing prices for customers.
In reality, for the biggest brands at least, retail prices are set in Switzerland, not by American jewellers.
When the additional 10% tariff was imposed on Swiss watches entering the United States in April, its cost was split between the importer, retailers and consumers.
Retailers and the brands accepted lower margins on each watch sold, but higher prices compensated so that the dollar-profits were maintained.
Clients were asked to pay anything from nothing to 10% more, but typically 3-5% extra; a price rise that the market appears to have taken in its stride.
Because these rises were typically modest, brands were not too concerned that parity across global prices would be unduly disturbed.
The proposed new 39% would be a great deal more challenging, not least because it comes on the back of price rises in January — triggered by record gold prices and the soaring Swiss franc — and the April hikes as Trump’s global 10% tariff hit.
Most industrialised Swiss watch brands have already seen demand decline in the United States since peaking in 2023, and their watches are being offered at significant discounts on the grey market.
Price rises for all-but Rolex, AP, Patek Philippe and Richard Mille will likely weaken demand even further.
This makes it more likely that, should the 39% rate hit, Switzerland’s brands will not force American consumers to carry the cost alone, they are more likely, in my opinion, to share the pain worldwide.
Global brands like Rolex, Audemars Piguet, Omega, Cartier and Patek Philippe do not like their watches selling at different prices around the world because it encourages jet-set clients to shop around for the best deals rather than build relationships with their local retailers.
It is worth noting that American retailers I have spoken to since last Friday have said they are not particularly troubled about demand shifting abroad if prices rise, but it is hard to imagine Canadian jewellers aren’t licking their lips at the prospect of a 10% price advantage over the US.
My expectation is that brands will not allow this sort of price differential to develop, which narrows their options on who carries the cost of increased tariffs.
If the playbook from the 10% additional tariff in April is followed, retailers, wholesalers and manufacturers would share the cost of the tariffs and price rises of around 10%, on average, would be expected in the USA as early as this week.
The rest of the world would be unaffected.
However, I do not believe a price differential of over 10% between the United States and other major markets would be tolerated for long, so the biggest brands would look to close it by limiting the rise in the United States and bumping prices around the rest of the world.
Protecting this parity between markets would spare American consumers of even higher prices; a highly desirable outcome in the Swiss watch industry’s biggest market by far.
Rather than hitting American customers with a double-digit price rise, it makes more sense for manufacturers to spread the burden of the tariffs across the whole world, most likely limiting price rises to under 2%, which most consumers would not even notice.