The words “trade war” are enough to rattle markets — and for good reason. When countries spar over trade policies, businesses and investors typically bear the brunt of the impact first.
Lately, headlines surrounding US-China relations have reignited concerns.
This article won’t dissect the politics of trade disputes, but it will help you understand their implications on inflation, corporate margins, global growth, and ultimately, your portfolio.
Let’s take a closer look at what defines a trade war, what history has taught us, and what prudent investors can do to prepare for the uncertainty ahead.
What Is a Trade War?
A trade war is a commercial conflict between two or more countries. Generally, the nations involved impose tariffs, quotas, sanctions, or other trade barriers against one another (often in quick succession) in an attempt to protect domestic industries, correct trade imbalances, or assert geopolitical leverage.
While trade disputes are common, not every disagreement qualifies as a trade war. What distinguishes a full-blown trade war is its scope, intensity, and duration.
Common tools used in trade wars include:
- Tariffs: Taxes on imported goods, often passed on to consumers in the form of higher prices.
- Quotas: Limits on the quantity of certain goods that can be imported or exported.
- Export Bans: Restrictions on the sale of specific materials, such as those used in tech or defense contexts.
- Subsidies: Government support to domestic industries, making them more competitive globally.
In short, a trade war is an escalating series of retaliatory actions that can disrupt the flow of global commerce.
A Brief History of Notable Trade Wars
To understand the consequences of trade wars, it helps to explore how they’ve played out before.
Smoot-Hawley Tariff Act (1930s)
In an effort to protect farmers and manufacturers during the Great Depression, the US passed the Smoot-Hawley Tariff Act in 1930, raising the country’s already high tariffs to about 60%, on average, for thousands of imported goods.
US trading partners fired back with “beggar-thy-neighbor” policies and tariffs of their own, which severely curtailed global trade. Many economists believe these policies deepened and prolonged the Great Depression, shrinking world trade by an estimated two-thirds by 1933.
US-Japan Trade Tensions (1980s)
In many ways, current trade issues between the US and China mirror past tensions with the leading Asian powerhouse of the 1980s: Japan.
- Both involved the world’s largest and second largest economies.
- Japan held the largest trade surplus with the US, a feat China claims today.
- Japan was highly reliant on the US, just as China is.
During the 1980s, growing concerns over the US trade deficit with Japan (especially in auto manufacturing and electronics) led to rising pressure on Japan to open its markets to American companies, limit exports, and stop suppressing yen relative to the US dollar.
Japan would eventually agree to “Voluntary Export Restraints” (VERs) on car exports to the US, which temporarily helped US automakers — but, in response, Japanese automakers like Toyota and Honda opened factories in the US soon after.
Multilateral agreements between the US and European nations as well as 100% tariffs on Japanese imports effectively boosted the yen’s value and raised the prices of Japanese products. Japan’s GDP growth stalled and policy decisions began to backfire en route to a prolonged recession.
US-China Trade War (2018-2020)
One of the most significant trade wars in recent history, the US-China conflict began in 2018 when the US imposed tariffs on billions of dollars’ worth of Chinese goods, citing unfair trade practices and IP theft. China quickly reciprocated with tariffs on US exports.
Examples of consequences:
- Semiconductors, tech hardware, and agriculture were hit hard. For instance, agriculture exports dropped by an estimated $27-30 billion by the end of 2019.
- Supply chains were disrupted, as many firms began relocating production from China to countries like Vietnam, Mexico, and India to avoid tariffs.
- Markets endured volatility: during 2018-2019, news of tariffs and trade talks triggered sharp swings in the S&P 500 and global equities.
While a “Phase One” agreement was eventually signed in January 2020, most tariffs remained in place and underlying tensions weren’t fully resolved.
Current Trade Tensions
Today’s headlines may feel like déjà vu. The US has reimposed and expanded tariffs on a wide range of imports, most notably from China. Under the current tariff structure, the average effective tariff rate on imports has jumped to 11.5% — the highest level since 1943.
Retaliation has already begun. China, Canada, and the EU have announced tariffs targeting $330 billion in US exports, raising the risk of supply chain and global trade realignments.
How Trade Wars Affect the Economy
Trade wars don’t happen in a vacuum. They affect prices, productivity, and long-term economic growth. Here are the most common areas impacted:
Tariffs are essentially a tax on imports. When they rise, so does the cost of doing business — and that cost is normally passed on to consumers.
For example, a 25% tariff on imported consumer electronics can directly raise shelf prices, squeezing household budgets and dampening purchasing power. The Tax Foundation estimates that trade war tariffs currently in place could cost the average US household $1,280 in 2025.
Business Margins
Companies with global supply chains or imported raw materials may see their input costs increase. While some can raise prices to protect profits, others (particularly in competitive industries) may have to absorb the impact, compressing margins and potentially slowing growth.
Global Supply Chains
One of the biggest consequences of trade wars is the forced reorganization of global production. More expensive imports generally spur businesses to seek more cost-effective outsourcing options or onshore operations altogether. While this can benefit some domestic sectors, it can also create near-term logistical friction and increase operating complexity.
Inflation and Economic Growth
Trade wars are usually inflationary. Higher input and logistical costs can drive prices upward. At the same time, slower trade and reduced business investment can weigh on GDP growth. According to the Tax Foundation, if recent US tariff expansions are fully implemented and met with retaliation, US GDP could decline by 1%.
How Trade Wars Affect Financial Markets
Markets don’t like surprises. Alas, trade wars are full of them. The threat (or implementation) of new trade policies can lead to sudden swings in stock prices.
Not all industries are affected equally either. Trade wars tend to target specific goods, services, or technologies, which can create winners and losers within the market. For example, higher costs on consumer goods like appliances and apparel can hurt margins and/or demand from price-sensitive consumers. Similarly, businesses that are reliant on foreign sales could suffer too, as retaliatory tariffs dissuade international markets from buying US products and services.
During periods of rising trade tensions, investors typically feel pressed to preserve capital, retreating from equities and piling into traditionally “safer” assets, such as Treasuries or gold. As a result, safe-haven assets tend to outperform during periods of sustained trade conflict.
How to Invest Amid Trade Tensions
Trade wars may dominate headlines, but they don’t have to derail your investment strategy. Here are a few practical ways to stay on track during periods of heightened economic uncertainty.
Focus on the Long Term
Markets may react sharply to trade announcements or tariff changes, but history shows that patient, long-term investors tend to fare better than those who listen to fear-mongering media. A short-term selloff triggered by policy pivots doesn’t necessarily reflect the long-term fundamentals of the companies or sectors involved.
In other words, stay focused on your time horizon, not today’s news alerts or push notifications.
Diversify Your Portfolio
Trade wars typically involve individual countries, industries, or goods. By diversifying across asset classes, geographies, and industries, you can reduce your exposure to concentrated trade risk. For example, if US-China tensions escalate, exposure to other emerging markets or asset classes may help offset the impact.
Identify Resilient Sectors
Some sectors are naturally more insulated from trade volatility, such as healthcare, utilities, or companies with strong domestic revenue streams. These defensive areas may offer relative stability when international supply chains or export revenues face headwinds.
Work With a Financial Advisor
An advisor can help you filter out the noise, evaluate your portfolio’s exposure, and adjust your strategy as needed. Trade tensions create uncertainty, but with personalized planning, you can position your investments to withstand short-term turbulence and continue progressing toward your long-term goals.
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