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(Updates with government comment in sixth paragraph.)

July 1 (Bloomberg) -- Swiss companies are stealing a march on European and U.S. rivals as a trade pact with China taking effect today slashes import duties on most industrial goods.

With the accord, China will cut tariffs on Swiss watches, machinery and chemical imports from companies including Swatch Group AG and robot-maker ABB Ltd.’s Swiss unit. Most tariffs will shrink immediately or within five to 10 years. China will overtake Germany as Switzerland’s biggest export market by 2035, according to a Credit Suisse Group AG survey of small- and medium-sized companies.

“It’s a huge advantage for us,” said Emanuel Probst, chief executive officer of Jura Elektroapparate AG, a Swiss maker of luxury coffee machines. Import taxes on Jura’s GIGA 5 household coffee maker, which sells for 4,250 Swiss francs ($4,775), will be cut to zero from 32 percent within five years.

The free trade agreement, or FTA, is a diplomatic coup for Switzerland after more than three years of negotiations, boosting company profits and helping to offset losses from the strong Swiss franc that lured customers to cheaper producers in countries including Germany.

Switzerland is the second European country after Iceland to have signed a deal with China, while neither the European Union nor the U.S. are in negotiations for FTAs with the world’s second-largest economy.

Growth Rate

The agreement “improves mutual market access for goods and services,” the Swiss government said in a statement today, adding that it would “contribute to long-term economic development.”

ABB, bathroom piping-maker Geberit AG, specialty chemicals manufacturer Lonza AG and yogurt-maker Emmi AG have welcomed the agreement, while the Swiss trade lobby called it a “milestone” for Switzerland.

The Federation of the Swiss Watch Industry, which represents about 500 timepiece makers including Swatch and Cie. Financiere Richemont SA, said it’s delighted with the FTA.

“The duty on Swiss watches will be reduced by 60 percent over the next few years” said Jean-Daniel Pasche, who heads the organization. “We will see an immediate impact.”

The FTA will also improve the protection of intellectual property, Pasche said, adding that “this will make it harder to counterfeit watches.”

Privileged Access

Jan Atteslander, head of international affairs at Swiss business lobby Economiesuisse, concurred.

“The FTA gives Swiss companies improved legal certainty in doing business in China,” he said.

China “is important because the growth rate will be substantially higher than Europe, it’s more dynamic,” said Jean-Philippe Kohl, an official at Swissmem, a lobby for 290 industrial companies including ABB and other machinery-makers that form the backbone of Switzerland’s export economy.

China’s economy is expected to increase 7.5 percent this year, compared with 1.2 percent in the euro area, according to the International Monetary Fund.

The deal gives Swiss industrial companies an edge over rivals in the U.S. and EU, with Chinese import tariffs reduced for 92 percent of products, Kohl said. Chinese import taxes are 9 percent on average for Swissmem companies compared to 2 percent to 3 percent in the U.S., he said.

Switzerland now has privileged access to a market that will keep demand in factories making chemicals to chocolate high, boosting jobs in one of the world’s most expensive places to manufacture. Swiss unemployment in the first quarter was 4.8 percent, less than half of that in the euro zone.

‘More Competitive’

The FTA will allow Swiss companies to save about 5.8 billion francs in tolls between 2014 and 2028, Daniel Kueng, head of export organization Switzerland Global Enterprise, told Neue Zuercher Zeitung on June 29.

“The agreement makes us much more competitive,” compared to rival coffee machine makers such as Italy’s De’Longhi Spa and Royal Philips NV’s Saeco unit, said Probst. “50 percent growth in China over the next 5 years is realistic.”

Such growth may help the Swiss extend their lead as the world’s leading industrial producers per capita. Industrial production in Switzerland has grown “sharply” since 2005, while traditional manufacturing nations such as Japan and Germany saw only a slight increase, and the U.K. saw a decline, according to a report by consulting firm Deloitte.

“We’ll immediately have a change in customs duties that will make trade with China easier -- that’s something we applaud,” ABB CEO Ulrich Spiesshofer told Swiss TV June 6.

Preferential Tariffs

It will become increasingly important for ABB’s Swiss unit as import taxes on electrical insulators, compressors and transformers are progressively eased, spokesman Antonio Ligi said by e-mail. Still, the China trade agreement covers a relatively small part of ABB’s group sales of $41.8 billion, he said.

Chinese exporters will also get preferential tariffs on exports to Switzerland, ramping up competition for products including textiles, shoes, sugar and foods. Bettina Rutschi, an economist Credit Suisse in Zurich, said that some parts of Swiss agriculture will remain protected.

China is already one of Switzerland’s most important foreign trade partners and the largest buyer of Swiss industrial products in Asia. Last year Switzerland exported goods worth 8.7 billion francs to China, while the Alpine nation’s imports from China totaled 11.4 billion francs.

At the same time, the EU is negotiating an investment pact with China, and has started to look at the feasibility of a free-trade pact. Even so, an FTA isn’t on the near-term agenda.

For Jura CEO Probst this is good news.

“Neither Europe nor the U.S. have an agreement like this and from our perspective I hope that it stays like this for a while,” he said.

--With assistance from James G. Neuger in Brussels.

To contact the reporters on this story: Patrick Winters in Zurich at pwinters3@bloomberg.net; Jan Schwalbe in Zurich at jschwalbe6@bloomberg.net To contact the editors responsible for this story: Simon Thiel at sthiel1@bloomberg.net Zoe Schneeweiss

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