INSIDER VIEW: The case for tariff hope

It’s difficult to put a positive spin on the recent announcement of a 39% tariff on Swiss watch imports into the USA by President Trump.

Steven Holtzman, vice chairman at CD Peacock in Chicago, summed the situation up neatly: “The dollar is weak, the Swiss franc is high and gold is at an all-time high, so it’s kind of like the perfect storm,” he said. “Prices have gone up, margins have gone down. I don’t think it’s good for anybody.”

So what possible cause is there for optimism?

To understand this, it’s worth remembering that the entire luxury watch industry is based on selling people something that they don’t need.

It’s been said a thousand times, but it’s worth repeating in the context of the inevitable price hike in the States as a result of this tariff increase. No-one needs a watch for its functionality (mobile phones can do better than even the most complicated watches), which means that people buy watches for irrational reasons.

They either see it as a beautiful piece of jewelry, an investment, or a status symbol. The group that sees watches as an investment will inevitably be affected by inflated prices. Their ROI will either be wiped out entirely or reduced significantly.

But those that buy watches because of their beauty/elegance/history, or those that wear a watch as a way of displaying their wealth and status, will not necessarily be as put off by less favourable prices as one might initially think.

In economics some goods are known as Veblen goods. Demand for these goods goes up when the price goes up, which flies in the face of what we would normally expect. Why? Because the higher price only enhances one of the key reasons why that individual wanted to purchase the item in the first place, namely to inflate their status/ego.

You see this across the entire luxury sector, whether it’s penthouse suites in the most expensive hotels, Chanel bags, or Ferrari cars. For those that want to look the best, price isn’t just not an object, it’s almost a fuel.

The concept of Veblen goods is represented by a sliding scale rather than being binary. In other words, at a certain level price sensitivity is very high, then it’s a bit less high, then at some point it becomes negative and demand actually goes up with the price rise, as described above.

Where each watch and each consumer lies on their respective sliding scales of price sensitivity is unknown, but being aware of the economic phenomenon even in its broadest terms should give some cause for cautious hope.

Does that mean that I believe jewelers across the States are about to enter new halycon days of prosperity? Of course not. The aforementioned headwinds of a weak dollar, a strong Swiss franc, and the introduction of this draconian tariff will all put a strain on businesses that buy and sell watches.

But the watch industry is stoic and resilient. In just my time working in watches, the storms of the 2008 financial crisis, Brexit, and Covid have all been navigated, albeit without much plain sailing along the way.

This latest bump in the road is just that: a bump in the road.