How Have Tariffs Affected Stock Markets Historically?

 

How Have Tariffs Affected Stock Markets Historically?

Tariffs are trade barriers that governments impose on imports to protect domestic industries. However, history shows they often lead to market instability, economic downturns, and retaliatory measures from other countries. Here’s how tariffs have impacted the stock market in key historical events:

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1. The Smoot-Hawley Tariff Act (1930) – Worsened the Great Depression

What Happened?

• The U.S. raised tariffs on over 20,000 imported goods to protect domestic industries.
• Countries like Canada, France, and Britain retaliated with their own tariffs.
• Global trade collapsed by 65% between 1929 and 1934.
• U.S. businesses that relied on exports suffered, leading to more layoffs and bankruptcies.

Stock Market Impact:

• After Smoot-Hawley passed, the Dow Jones fell another 40% in 1930.
• By 1932, stocks had lost 90% of their value from their 1929 peak.

Lesson:

• Protectionist policies during economic downturns exacerbate recessions instead of fixing them.
• The U.S. and other countries eventually reversed tariffs to restart trade.

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2. Reagan’s Tariffs on Japan (1980s) – Mixed Market Impact

What Happened?

• The U.S. imposed tariffs and import quotas on Japanese cars, semiconductors, and steel.
• Japan agreed to "voluntary export restraints" on car exports.

Stock Market Impact:

• Unlike in the 1930s, the U.S. economy was strong, so the stock market continued to rise through the 1980s.
• However, Japan’s stock market boomed artificially, then crashed in 1990.

Lesson:

• Tariffs can temporarily boost domestic industries but distort markets and lead to bubbles.

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3. Trump’s Trade War with China (2018-2019) – Increased Volatility

What Happened?

• The U.S. imposed tariffs on $360 billion worth of Chinese goods, focusing on tech and manufacturing.
• China retaliated with tariffs on $110 billion in U.S. goods, hitting farmers and tech companies.

Stock Market Impact:

• The S&P 500 fell 20% in late 2018 due to trade war fears.
• However, Fed interest rate cuts in 2019 reversed the market decline.
• Long-term effects hurt supply chains and raised costs for U.S. businesses.

Lesson:

• Short-term pain: Stock markets react negatively to tariffs due to fears of a slowdown.
• Long-term adaptation: Companies relocate supply chains, but uncertainty increases volatility.

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4. Biden & Trump’s Tariffs (2024-2025) – Current Risks

What’s Happening Now?

• Trump’s new 2025 tariffs on Canada, Mexico, and China are sparking concerns of another trade war.
• If countries retaliate, industries like tech, autos, and agriculture could suffer.

Stock Market Impact (So Far):

• The Dow Jones fell 1.5% on March 3, 2025.
• Nvidia lost nearly 9%, showing tech stocks are vulnerable.

Potential Future Outcomes:

• If tariffs expand, markets may drop further.
• If tariffs are negotiated away, markets could rebound.
• The Fed’s response (rate cuts or stimulus) will determine the long-term outcome.

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Final Takeaways:

• Short-term: Tariffs create stock market volatility as businesses adjust.
• Long-term: Trade wars tend to reduce economic growth and stock returns.
• Policy Matters: Governments reversing or modifying tariffs can stabilize markets.