Did the letter require you to do anything like report in person, make a declaration or anything?
If not, then do not respond to it... simply ignore. In most cases, such cases are routine and the watch will be held and I do not think that it would have dire ramifications. You should of course categorically deny all connections with this watch, that your friend in China sent it to you as a gift and you have no knowledge of it, that there was a mistake in your order, or whatever excuse you could concoct. Like you mentioned, it is just a single watch, and not an entire pallet of watches. The customs would not pay too much attention to you or the watch, is my guess. Also, I doubt that you would be on any "list" at all. Reason being, there could be any number of reasons that the watch was shipped to your address. Unless facts are established, I seriously doubt that you will get into any trouble at all over this.
I would like to think that the Homeland Security has more serious concerns to see to than this (and many many other) minor replica purchase in the country.
You should also inform the TD involved regarding this customs confiscation and see if they declared it as anything out of the ordinary.