Watches and Wonder is feeling more like Davos for the Swiss watch industry today as executives from the world’s biggest luxury brands and their retail partners attempt to make sense of overnight news that an additional 31% tariff will be charged on all imports from Switzerland into the United States.
Watches of Switzerland Group shares plunged by 12% in the first two hours of trading this morning to £3.76 — a seven month low — as investors calculate the tariff’s impact on the luxury watch retailer’s American business.
Swatch Group shares were down by 5% in morning trading, extending a sell-off that has now seen the company’s value drop by 20% in the past month.
If investors in these companies know how the impact of President Trump’s tariffs will play out in the coming days and months, they are better-informed than executives inside the watch industry, which until yesterday appeared to be merely hoping for the best rather than planning for the worst.
A 31% additional tariff on all imports of Swiss watches into the United States is pretty much the worst case scenario, and there is no reason to believe it is just a negotiating position that will soon be reversed.
Switzerland was singled-out in what the White House billed as Mr Trump’s Liberation Day address as part of an explainer on how tariffs on different countries had been calculated.
His reasoning is simple. Work out what costs American exporters face when trading in a foreign country and turn that into an average percentage charged on every landed item.
These costs, the president explained, are the level of “tariffs charged to the USA including currency manipulation and trade barriers”, although the calculation appears to be based more on trade deficits between countries.
Switzerland exported goods to the United States worth CHF 63.4 billion last year. Minus imports coming the other way, this created a CHF 38.5 billion (62%) deficit, the figure stated by Mr Trump, and on which the 31% new tariff — half the calculated costs incurred by American exporters — is based.
Contesting the calculation of this 62% is, for now, futile, although reducing the figure will certainly be critical to future trade and tariff negotiation.
It represents an affront to the current American administration, which frames it as stealing money and jobs from the country’s workers; a key issue on which Trump campaigned during the election.
Interestingly, in conversations with American retailers in Geneva this morning, I got the impression that they think President Trump is right to point out this unfairness — or at least imbalance — in the global trading system and shared the view that other countries have been freeloading for decades.
Switzerland, according to the Trump team, is one of the worst culprits.
Ranked in an order that appears to take into account trade imbalances, Switzerland made the top 10, with what the Administration perceives as a worse trading relationship than with Indonesia, Malaysia and Cambodia.
This is not the prevailing view in Palexpo today.
Mr Trump was always more popular in his home country than in Europe (Kamala Harris would have won the last presidential election by a landslide if only members of the EU got to vote for American presidents), but he is now seen as a direct threat to a Swiss watch industry already reeling from weakening global demand over the past year.
That global demand would have been a whole lot weaker had it not been for the Americans, which imported Swiss watches valued at CHF 4.4 billion last year, double the size of the next biggest market in the world, Mainland China, and greater than the sum total of exports to China and Japan, combined.
From total global Swiss watch exports worth CHF 26 billion last year, the United States accounted for almost 17%.
If the new 31% tariff had been in place last year, all things being equal, it would have raised CHF 1.36 billion ($1.56 billion) for the US Treasury.
How will the Swiss and American watch industry respond?
Assuming exports to the United States continue at roughly the level of 2024, and the ensuing $1.56 billion in additional tariffs is paid, the question is by whom?
I looked at this in my column yesterday, which was written ahead of White House announcement, so I will revisit it with what we know now.
When 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 will be 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 31% more for every watch they buy.
Manufacturers in Switzerland could adjust the price they charge for these exports, but that would be an immediate hit to sales revenue and profit. Fears over this outcome are contributing to falling share prices for Swatch Group and Richemont this morning.
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.
However the pain is spread, it will result in a major distortion in the global market for prestige watches.
Global brands like Rolex, Audemars Piguet, Omega, Cartier and Patek Philippe do not like their watches selling at different prices around the world.
Routinely, they adjust prices because of currency fluctuations.
For example, when Britain voted to leave the EU in 2016, the pound plunged in value, which meant overseas visitors to the country could buy watches considerably more cheaply than at home.
And this is exactly what happened, leading to a boom for British jewellers and fury from their rivals around the world.
Brands responded by increasing prices in the UK to wipe out the advantage and bring peace back to the Perpetual Planet.
If American tariffs make Swiss goods 31% more expensive (i.e. the whole cost of the tariff is passed onto the consumer), it will hit demand in the watch industry’s biggest global market.
Of course not all Americans would shop overseas just because the price of a Submariner has risen from $10,000 to $13,100, but the post-Brexit experience in Britain suggests many would.
Moreover, the HNWIs who might pay six figures for a watch constantly travel the world. Shopping for watches at one third-off could be woven into any foreign business trip.
It is safe to assume that brands will not allow this price differential to develop, which narrows their options on who carries the cost of increased tariffs.
My hunch is that they will share the pain around because they need to minimise the price rise that is passed onto consumers in the United States.
This will mean retailers, wholesalers and manufacturers each share the cost of the tariffs.
Let’s take the example of a watch with a $10,000 retail price imported with a taxable value of $5,000.
The $5,000 value of the watch will incur an additional $1,550 tariff for the importer. Passing on this cost to the consumer would increase the price of their watch by 15.5%; better than 31%, but still enough to mean brands would need to adjust prices worldwide to close the differential.
But the wholesaler and retailer could eat half of the cost each, meaning a price rise of 7.75% to the consumer. While nobody welcomes this sort of inflation, we are talking about a watch market that barely noticed when Rolex increased the prices of its gold watches by up to 14% in January this year.
However, a price differential of 7.75% between the United States and other major markets would not 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.
Going back to the earlier example, the currency adjusted price for a Submariner might rise worldwide, including in the United States, by 1-2%, a perfect outcome for American jewellers, which might also be benefiting from an improving economy if — as my conversations with US retailers today suggest — President Trump turns out to be right about what will make America wealthy again.