Why Switzerland faces a unique struggle

Switzerland is scrambling to make a trade deal with Washington as it looks to avoid a “triple blow” of economic problems after being hit with 39% tariffs on goods imported to the U.S.

Swiss leaders this week travelled to Washington D.C. in an attempt to strike a deal with the U.S. administration in a bid to avoid the hefty duties which will come into effect Aug. 7.

The 39% tariff rate, which is one of the highest in U.S. President Donald Trump’s latest flurry of new duties, came as a surprise to the European country as a trade agreement had seemingly been imminent.

Trump told CNBC on Tuesday that Swiss President Karin Keller-Sutter “didn’t want to listen” to his concerns about the U.S. trade deficit with Switzerland. Following the announcement of the 39% tariff rate, the Swiss government said Switzerland had maintained a “very constructive stance from the outset” during “intensive” talks.

The U.S. recorded a $38.3 billion trade deficit with Switzerland when accounting for goods, and a $29.7 billion surplus in the services realm last year, according to the Office of the United States Trade Representative.

The looming tariffs are expected to not only hit Swiss companies, but concerns have also emerged about the wider impact on the country’s economy.

Quarterly economic growth has remained somewhat muted for some time, with gross domestic product expanding by 0.5% in the first quarter of 2025.

Swiss inflation has also long been at low levels, even turning negative earlier this year. In July, the consumer price index came in at 0.2% compared with the same month a year earlier.

As long as pharmaceutical products — which are key Swiss exports — are not affected by tariffs, their impact on economic growth may be limited, Adrian Prettejohn, Europe economist at Capital Economics, told CNBC.

“We estimate that the current tariff rate of 39%, but with exemptions for pharmaceutical products, would reduce GDP by around 0.6% in the medium term. While this is significant, it is not catastrophic, indeed it is equivalent to around only three months of economic growth,” he explained.

However, Trump also told CNBC in Tuesday’s interview that a sector-specific tariff on pharmaceuticals could go as high as 250% within the next 18 months.

U.S. duties on pharma imports would be a major blow to Switzerland, a major hub for the global pharmaceutical industry. In 2023, the life sciences sector contributed 38.5% of Swiss exports.

The sector-specific duties would “likely “take the aggregate impact of US tariffs on Switzerland’s GDP to over 1% and potentially as much as 2%,” Prettejohn said.

“Pharma is by far the most important export for Switzerland,” Torsten Sauter, head of Swiss equity research at Kepler Cheuvreux, said in a note on Monday. “Here, Switzerland has leverage via US pharma reliance, but it must tread carefully — one misstep could trigger a devastating 39% tariff on its most valuable sector.”

Beyond Trump’s tariffs, demand for the Swiss franc is also adding to Switzerland’s economic and diplomatic woes.

Since the beginning of the year, the currency — typically seen as a safe haven asset in times of uncertainty or market turbulence — has gained around 11% against the U.S. dollar. Its surging value has been weighing on inflation, prompting the Swiss National Bank to reduce its key interest rate to 0% in June.

Swiss exporters are now facing a “triple blow” of problems, said Kepler Cheuvreux’s Sauter in his note on Monday.

“Steep tariffs … [would] come on top of a weak USD/CHF currency pair, and a competitive disadvantage compared to neighbouring countries,” he explained.

The European Union recently secured a deal with the Trump administration that will see a blanket 15% tariff imposed on goods the bloc exports to the U.S. — a significantly lower rate than Switzerland faces.

Kamal Sharma, G10 FX strategist at Bank of America, told CNBC on Wednesday that Trump’s trade policies were putting the Swiss National Bank in “a very, very difficult situation.”

“I think the big issue is that from a rates perspective, the market is now starting to get a little bit more concerned, because negative [rates] is something that’s always on the horizon,” he said. “There is some concern that if the U.S.-Swiss trade deal stays as it is, it means it’s going to press the SNB into further accommodative action.”

In the past negative rates have done little to increase inflation and weaken currencies, and are also unlikely to cushion a tariffs blow, Sharma said.

“The more direct response that the SNB could take is to say, look, we need to offset this by engineering some currency depreciation, and what that does is that it brings intervention back into play. So intervention now is more likely than it was before,” the strategist added.

But that isn’t an easy move for Swiss policymakers to make. SNB intervention in the foreign exchange market led to Switzerland being labeled a currency manipulator during Trump’s first term, and earlier this year the country was added to a “Monitoring List” of trading partners “whose currency practices and macroeconomic policies merit close attention.”

Trump’s tariff policy also takes into account any “currency manipulation and trade barriers.” Swiss officials have denied accusations of deliberately devaluing the Swiss franc against the greenback.

However, BoA’s Sharma said that the SNB is likely to plow ahead with currency intervention, even if it “may further incur the wrath of the U.S. administration.”

“In some ways, [they’ve] got nothing more to lose … they have to start thinking about Swiss industry.”