‘Trumped’ only by Syria, Myanmar and Laos, Switzerland hit by surprise 8% hike over the White House’s already-controversial 31% of April, with negotiators facing August 7th deadline
A seven-day ‘grace’ period will see Helvetian finance ministers scrambling for a last-minute reprieve on a huge hike over the 10% rate that has been agreed over the interim period, since America announced its 31% bill on April 2nd, sending Watches & Wonders exhibitors into a spin, on top of the small matter of globally launching their latest wares at Palexpo, Geneva.
At 39%, this is more than double the 15% rate announced for most European Union imports into the United States.
At a time of weaker-than-ever demand for Swiss watches, this body blow from the industry’s biggest market (16% of CHF26bn total export value makes USA Switzerland’s cashcow, over China and Japan) it’s likely to see the industry braced for price hikes worldwide in an attempt to absorb the imminent cash drain. 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. At the time of writing, share prices for Watches of Switzerland were down by 9% just hours after Mr Trump’s announcement.
The Swiss Federal Council said it remained in contact with U.S. authorities about the tariffs and “continues to strive for a negotiated solution”. It also expressed its “great regret,” pointing out that the new tariff rate differs “significantly” from a draft framework the countries had been negotiating.
The announcement came from the White House via ‘Annex II’ to its Executive Order 14257 of April 2nd, “Regulating Imports With a Reciprocal Tariff To Rectify Trade Practices That Contribute to Large and Persistent Annual United States Goods Trade Deficits”.
Back in April, Mr Trump found that “large and persistent annual U.S. goods trade deficits” constituted an extraordinary threat to the national security and economy of the United States”, citing a “continued lack of reciprocity in our bilateral trade relationships” with foreign trading partners.
Mr Trump declared a “national emergency”, and four months down the line, circumstances now sees his administration fit to impose “additional ad valorem duties on goods of certain trading partners.”
Latin for ‘according to value’, an ad valorem import tariff is a type of duty that is calculated based on the value of the imported goods. This means that the tariff rate is a percentage of the value of the goods being imported.
That value, according to the Swiss Federation of Horology (fhs.ch) is 16.8%, or over CHF4bn.
Mr Trump’s 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.
We’ll leave it to WatchPro’s editor-at-large Rob Corder to assess the likely fallout, as he did on April 3rd under similar circumstances:
“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.”