Hefty US tariffs on Swiss exports and their consequences

Before the new US customs regulations came into force, tough negotiations took place between the US and its trading partners. While the EU was able to agree on a customs duty of 15%, Switzerland has been particularly hard hit with a rate of 39%. However, a look at the Swiss market shows that short-circuit reactions should be avoided and that, instead, a long-term, fact-based analysis and strategy is worthwhile, as practised by Colin&Cie.

The introduction of US customs duties – Timeline

At the beginning of February, Switzerland was still optimistic that it would be able to avert a trade conflict with the United States – not least because it does not impose tariffs on US goods itself and is one of the largest investors in the United States. However, in March, Switzerland was placed on a list of countries engaging in ‘unfair trade practices’ by Washington. On ‘Liberation Day’ in early April, President Trump imposed high tariffs on almost all trading partners. For Switzerland, the rate was initially 31%, significantly higher than the 20% for the EU. When the measures were suspended for 90 days shortly afterwards, the government in Bern worked on a bilateral solution. While the EU was able to secure a tariff rate of 15% at the end of July, Washington rejected the Swiss offer as insufficient. On 1 August, the Swiss National Day, Trump finally announced that a 39% tariff on imports from Switzerland would apply from 7 August. It is one of the highest tariff rates imposed by the US worldwide.

Short-term effects on the financial markets

While the Swiss stock index – Swiss Market Index (SMI) – reacted with sharp losses after the so-called ‘Liberation Day’, the reaction of stock market participants to the final tariff decision on 1 August was surprisingly subdued. Despite the increasing burden on export-oriented Swiss companies – in addition to the high tariff rate, the Swiss franc has appreciated by 11% against the US dollar since the beginning of the year – movements on the stock and currency markets remained low, as the following two charts show.

Weekly performance of the Swiss Market Index (SMI) - Source: LSEG Datastream, Colin&Cie 

Weekly development of the USD/CHF currency pair - Source: LSEG Datastream, Colin&Cie 

The following reasons can be cited for the market behaviour observed:

1. The three-day stock market closure due to the public holiday and the subsequent weekend gave the Swiss stock market a breather. The situation could be analysed comprehensively and the impact on companies weighed up. In addition, the Swiss Federal Council's immediate decision to continue talks with the US and to strive for a reduced tariff rate as soon as possible had a calming effect on market participants during this period.

2. The impact of the new tariffs is limited to certain sectors: they are levied exclusively on goods, which means that Switzerland's traditionally strong service sector – particularly banking and insurance – remains unaffected. The healthcare industry is also exempt from the measures. Furthermore, Swiss companies that already operate production sites in the US are not affected.

Medium-term impact on financial markets

Considering the exceptions mentioned above, more than 60% of the companies listed on the Swiss Market Index are not subject to the new US customs regulations. These include the healthcare, banking and insurance (financials) sectors, as well as companies focused on the domestic market in the communications and real estate sectors.

Weighted composition of the Swiss share index by sector - Source: LSEG Datastream, Colin&Cie

The sectors affected by customs duties to varying degrees include the watch and jewellery industry – for which the US is one of the most dynamic sales markets – as well as mechanical engineering and chocolate production. Many listed Swiss companies already manufacture directly in the US to serve the local market and protect themselves from trade barriers. These include the SMI-listed companies Nestlé (food), Roche (healthcare), Novartis (healthcare) and Sika (chemicals). Other listed Swiss companies also rely on US production sites, such as Tecan (laboratory technology), Stadler Rail (rail vehicles) and Lindt & Sprüngli (chocolate).

It can be assumed that companies with a strong market position will strive to maintain their high quality standards. This positioning should enable them to pass on new tariffs to end customers through price adjustments. With earnings expectations of +3.2% in Switzerland compared with -1.1% in Europe, the companies listed on the SMI continue to show robust prospects. The valuation (price-earnings ratio) of Swiss equities also remains attractive.

Expected corporate profits (annual changes, profit growth in %) - Source: LSEG Datastream, Colin&Cie

Over the past few decades, Switzerland's export-oriented economy has consistently responded to external pressures with flexibility and adaptability. A striking example of this is the historically strong Swiss franc, which has appreciated by almost 60% against the euro since 2000 – a development that many companies have successfully navigated. 

The following effects of the new US tariffs are likely to be felt in the second half of the year:

Inflation: Higher prices for Swiss products in the US will not affect price trends in Switzerland but will cause inflation to rise in the United States.

Economy: A decline in US exports could slow economic growth, dampen Swiss companies' willingness to invest and lead to an increase in unemployment in the medium term.

Interest rates: In response to the extensive US tariffs, the Swiss National Bank (SNB) could consider lowering interest rates at its next meeting on 25 September. However, there are risks that should not be underestimated that argue against such a move into negative territory. These include a possible overheating of the property market and additional burdens on the financing of pension provision. There is also a risk that an interest rate cut by the SNB could be interpreted by the US as market manipulation, which could further complicate negotiations on a more moderate tariff rate.

Conclusion

The negotiations with the US, which have been ongoing for months, have led to a very unfortunate outcome for Switzerland. In an already challenging environment, the challenges for companies have become even greater. Fortunately, however, market participants have reacted with remarkable calm to the latest tariff announcement. Thanks to the sectoral structure of the Swiss market, key industries remain largely unaffected. Solid fundamentals – in terms of earnings, valuations and the interest rate environment – and the Swiss economy's proven ability to cope with external pressures also suggest that this ‘shock’ can be absorbed. Finally, there is still justified hope that the US government will be persuaded to adopt a more moderate tariff approach in the next step.

Independent analyses by Colin&Cie

Our ‘Analysis of the impact of massive US tariffs on the Swiss economy’ is an ‘independent research note’. Its aim is to provide customers and non-customers alike with unbiased and comprehensible information on current developments on the stock market and to give an assessment of the outlook for the next six months. To evaluate financial markets and asset classes, we draw on historical economic data, our own valuation models and over 250 indicators with objectively measurable criteria. With this purely fact-based approach, we consciously distinguish ourselves as an independent asset manager from subjective or unverifiable forecasts based on media or other influences.

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