Do Tariffs Really Work? What History & Markets Say
Understanding Tariffs: Their Economic and Market Impact
With tariffs now front and center, history shows they have had mixed effects on the economy and markets. While past examples like Smoot-Hawley were disastrous, Trump’s tariffs did not derail economic growth or markets. If Trump 2.0 leads to trade wars, volatility could rise. Given high valuations, a well-crafted tariff strategy, and likely focused tariff strategy will be critical to sustaining market strength and minimizing market impact.
In writing this article, my main mission is to explore three main areas that would be helpful as an investor:
- Understanding the purpose of tariffs.
- Examining their potential impact on economic activity and markets.
- Reviewing historical examples of past presidents who have used tariffs extensively and analyzing the results.
The Purpose of Tariffs
Tariffs have long been used as a tool for economic policy, national security, and trade negotiations. While they may seem like a straightforward way to protect domestic industries, their broader economic effects can be complex and far-reaching.
What Are Tariffs?
Tariffs are taxes imposed by a government on imported goods and services. They are typically used to:
- Protect domestic industries by making foreign goods more expensive.
- Raise government revenue through import taxes.
- Leverage trade negotiations by incentivizing foreign countries to adjust their trade practices.
Tariffs can be specific (a fixed dollar amount per unit of a product) or ad valorem (a percentage of the product’s value).
When Was the Last Time a President Imposed Significant Tariffs?
One of the most notable recent examples of a U.S. president imposing significant tariffs occurred under President Donald Trump.
In 2018 and 2019, the Trump administration implemented tariffs on steel (25%) and aluminum (10%) imports, along with hundreds of billions of dollars in tariffs on Chinese goods. These actions led to a trade war with China, resulting in retaliatory tariffs on American exports.
President Trump’s Tariffs During His First Term
- Steel and Aluminum Tariffs (March 2018)
- Tariff Details: 25% on steel, 10% on aluminum.
- Initially applied globally but exemptions were temporarily granted to Canada, Mexico, the EU, Brazil, South Korea, and Australia.
- Later: Canada and Mexico saw tariffs lifted in May 2019 under the USMCA agreement.
- U.S.-China Trade War Tariffs (2018-2019)
- Tariff Details: Imposed in multiple waves under Section 301 of the Trade Act of 1974.
- Key Dates & Tariffs:
- July 6, 2018: 25% tariff on $34 billion worth of Chinese goods.
- August 23, 2018: Another $16 billion worth of goods hit with 25% tariffs.
- September 24, 2018: A 10% tariff on $200 billion worth of Chinese goods (later raised to 25% in May 2019).
- December 2019: Additional tariffs on $160 billion worth of consumer goods, later reduced under the Phase One Trade Deal (January 2020).
- Tariffs on the European Union (2019-2020)
- October 2019: 25% tariffs on European aircraft, wine, cheese, whiskey, and other goods in retaliation for EU subsidies to Airbus.
- June 2020: 25% tariffs expanded on more French and German products.
- Tariffs on Canada and Mexico (2017-2019)
- April 2017: Lumber tariffs on Canada (20% average).
- June 2018: Steel and aluminum tariffs imposed (removed in 2019 under the USMCA).
- May 2019: Threatened 5%-25% tariffs on all Mexican imports over immigration concerns but did not follow through.
- Tariffs on India & Turkey (2018-2019)
- May 2019: Trump removed India and Turkey’s special trade status (GSP program), making certain goods subject to tariffs.
- August 2018: 50% tariff on Turkish steel imports (in response to political tensions).
Was This Inflationary?
It was not. US Consumer Price Index year over year (CPI) remained controlled during this period, contrary to expectations. Strong economic growth, low unemployment, and rising wages helped absorb price increases.
As you can see from the chart below, CPI during President Trump’s first term was relatively under control. When he was sworn into office, CPI was approximately 2.50%, it hit a high of 2.87% in July of 2018, then proceeded to decline, even before COVID.
How Did the Economy Perform?
The U.S. economy grew at a healthy rate until COVID struck. More recently, President Joe Biden has maintained many of Trump’s tariffs and introduced new tariffs on Chinese-made electric vehicles, batteries, and semiconductors in 2024. Despite this, the economy and markets have remained resilient.
How Do Economies Perform When Tariffs Are Implemented?
The economic impact of tariffs depends on their scope, duration, and the response of trading partners. Historically:
- Tariffs can slow economic growth if they increase production costs and reduce trade.
- Retaliatory tariffs can hurt exporters by reducing foreign demand for goods.
- Certain industries, like steel and auto manufacturing, may benefit, but those reliant on imports (like tech companies) may suffer.
For example, the 2018-2019 tariffs on China led to supply chain disruptions and increased costs for U.S. manufacturers, contributing to weaker global growth.
How Do Stock Markets Perform When Tariffs Are Implemented?
Stock markets tend to react negatively to tariffs due to trade uncertainty. However:
- 2017, 2019, and 2020 were strong years for the stock market.
- 2018 saw a slight decline, largely due to Fed rate hikes rather than tariffs.
- Markets dislike tariffs in the short term but adapt over time.
Do Tariffs Cause Inflation?
Textbooks say yes, but historical data suggests otherwise. While tariffs increase costs, broader economic factors (like a strong economy and wage growth) can offset inflationary pressures. Inflation remained controlled during Trump’s first term.
Do Consumers Change Their Buying Habits?
Yes, consumers tend to:
- Switch to domestic alternatives if available and competitively priced.
- Seek substitutes from non-tariffed countries.
- Reduce spending on high-cost goods.
For example, after the 2018 washing machine tariffs, many consumers switched to U.S.-made models, though prices still rose overall.
Do Tariffs Help in Negotiating Trade Agreements?
Tariffs can be a negotiation tool but come with risks:
- The U.S.-China trade war led to the Phase One Trade Deal (2020).
- Tariffs influenced NAFTA renegotiations, leading to the USMCA.
- Overuse of tariffs can damage diplomatic and economic relationships.
Who Ultimately Pays the Tariff?
Despite political rhetoric, domestic consumers and businesses bear the cost of tariffs, not foreign governments.
- Importers pay tariffs when bringing goods into the country.
- Businesses pass costs to consumers, leading to higher prices.
The Worst Tariff Policy in U.S. History
The Smoot-Hawley Tariff Act (1930), signed by President Herbert Hoover, worsened the Great Depression by triggering retaliatory tariffs, collapsing global trade, and deepening the economic downturn.
The Wall Street Journal
is similar to what I am discussing in this article. Below was a headline from the Wall Street Journal about tariffs.
References “Wall Street Journal’s Take on Tariffs”
A Wall Street Journal article highlighted the benefits and risks associated with tariffs. The key points included:
- Investors who viewed Trump’s trade war as “more bark than bite” were proven correct.
- Tariffs worked well in negotiations with Colombia, Canada, and Mexico, but success is not guaranteed in every case.
- Overreliance on tariffs could push U.S. effective tariff rates to their highest levels since the 1930s, which could be detrimental to the economy.
- The post-Brexit U.K. example shows that trade uncertainty can weigh on business investment.
- While tariffs can incentivize domestic production and export-oriented industries, fully shielding domestic industries from competition has historically been ineffective.
The WSJ concluded that while tariffs can be useful, their extensive use could introduce risks given the high market valuations.
Core Inflation, Economic Growth, Economy, tariffsBy: 2 Market Media
