-Switzerland is known for its craftsmanship.
The possessive form of "it" is its. There is no apostrophe in the possessive form of the word.
its = possessive form of "it"
it's = it is
-They are famous for their chocolate, cheeses, watches, army knives and cow bells.
The comma after army knives is called an Oxford comma. It isn't wrong, and you can use it if you want to, but it isn't necessary.
-The costumes are worn during/at festivals.
A festival is an event, so you can't really wear something on it... The meaning isn't lost, and this is kind of a gray area, but I think during or at would sound better.
-The yodel songs are about local life.
No change.
-Dances are a big part of Swiss culture.
Swiss, like Switzerland, is a proper noun. It is therefore capitalized.
-Mountain sports are very popular, because 60% of the country's land is mountainous.
I don't think that what you wrote was wrong, but it sounded a bit awkward.

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