Assessing implications and next steps for the Swiss tariff shock

On Switzerland’s 1 August National Day, the US imposed a 39% import duty on the country. The move came as a surprise as the Swiss government was engaged in reportedly constructive negotiations with the Trump administration in July and hadn’t received a prior tariff notice. Higher than the initial levy announced by President Trump on 2 April, and much steeper than the European Union’s, this tax is expected to come into effect on 7 August.

We expect negotiations to continue until 7 August or beyond. We believe the US and Switzerland will agree on a tariff rate closer to the EU and Japan’s 15%, albeit with some potentially challenging concessions. We also anticipate more foreign direct investment (FDI) commitments by Switzerland and a higher volume of imports from the world’s largest economy.

Economic impact and implications for the SNB

Switzerland is one of Europe’s most exposed economies to US tariffs. It is worth highlighting however that baseline tariffs outlined on 1 August exclude all the sectors that are already subject to, or will be subject to, sectoral tariffs. These fall under a provision known as Section 232 that allows the US President to impose import duties for reasons of national security. This is crucial for the Swiss pharmaceutical industry, which sends around 40% of its exports to the US. The fact that the EU was able to obtain visibility on the level of tariffs on pharmaceutical exports in its trade deal, regardless of the outcome of Section 232, may signal US openness to derogate. Swiss exports of gold are also affected, albeit to a lesser extent.

This still leaves around half of Swiss exports to the US exposed

This still leaves around half of Swiss exports to the US exposed to a very high baseline rate of 39%. These exports are typically high-value-added goods, such as watches, precision machinery, and medical devices. As they face inelastic demand, in many cases and for some price ranges, US importers could pass most of the duty through and charge their customers more for Swiss products, without seeing a significant decrease in demand. A small fraction of exports, such as certain luxury watches, may see their demand increase with the price. However, for the vast majority of Swiss exports, there is a limit to this logic. While Swiss firms can generally weather a 10-15% tariff without major margin erosion or demand loss, 39% sets the bar much higher. If the new tariff rate is confirmed, it could lead to margin cuts or a sizable drop in US sales for Swiss exporters, with the exception of some luxury goods.

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We had revised our 2025 real GDP forecast for Switzerland to 1.1% (from 0.7% previously) to incorporate a stronger than expected first half, but President Trump’s new 39% tariff announcement and associated uncertainties on US-Switzerland trade prompt us to adopt a more conservative assumption at 0.9%. If the US implements more punitive sector tariffs on pharmaceutical products, this outlook faces downside risks. The longer such tariffs stay in effect, the bigger the risks for the Swiss economy, until it adjusts to the shock. We expect Bern to intensify its negotiations with the Trump administration.

The tariff announcement and uncertainties prompt a more conservative Swiss GDP assumption of 0.9%

For the Swiss National Bank (SNB), we estimate that its zero percent policy rate will hold if the country can successfully negotiate a tariff closer to 15% but if the 39% tariff is confirmed, or sectoral tariffs on pharmaceutical exports prove high for the economy, the likelihood of negative SNB rates would increase.

Implications for Swiss assets

We expect Swiss government bond yields to decline and still believe that corporate bonds and real estate can offer attractive sources of income. Swiss stocks will likely decline during this period of uncertainty. Healthcare represents 37% of the Swiss Market Index, and the treatment of pharmaceutical exports is therefore key for Swiss equities. As mentioned above, pharmaceuticals do not fall into the goods category taxed at 39%.

In the short term, we anticipate some sector differentiation

In the short term, we anticipate some sector differentiation. Construction suppliers and insurance stocks have held up well amid earnings outlook downgrades during the recent reporting season. More domestically-oriented defensive sectors, such as utilities, are likely to be more sheltered. With the SMI’s price-to-earnings ratio of 16.6x, valuations of Swiss stocks are in line with the 10-year average of around 17x and the market has lagged other regions year to date. This can mitigate the potential downside, as well as the defensive sector bias of Swiss equity indices and the country’s low interest rates. The evolution of the Swiss franc will matter as well.

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Having strengthened for several years, the Swiss franc looks overbought against the euro: the EURCHF exchange rate has been flat in recent months and unable to decline below 0.9200. While US tariffs on Switzerland may ultimately be watered down, we assume some initial move higher in EURCHF towards 0.9500. USDCHF could also remain well supported, although broader USD dynamics may matter more for the currency pair with the latest weak US labour market data preventing a more material USDCHF recovery. Further out, our 12-month assumptions for USDCHF and EURCHF stand at 0.79 and 0.93, respectively.