Tariffs have been an essential tool in the toolbox of governments for centuries, influencing the flow of international trade, economic policy, and the balance of power in global markets. While tariffs serve as a means for governments to protect domestic industries and raise revenue, their impact on the stock market has been far-reaching and often unpredictable. Historically, the introduction or increase of tariffs has caused market volatility, as we’ve witnessed lately, specifically in US markets. While there are many other factors in play when it comes to how the stock market performs, let’s look at how the market fared during previous periods when tariffs were put into place.
One of the most infamous examples of the impact of tariffs on the stock market is the Smoot-Hawley Tariff Act of 1930, which set the stage for the global economic downturn known as the Great Depression. The U.S. Congress passed the Act in an effort to protect American farmers and manufacturers from foreign competition during a period of economic downturn. The tariff raised duties on over 20,000 imported goods, ranging from food to industrial products, with the expectation that domestic production would rise.
However, the Smoot-Hawley Act had devastating effects on the global economy and the stock market. As other nations retaliated with their own tariffs on U.S. exports, international trade volumes plummeted. The collapse of trade worsened the Great Depression, deepening unemployment and reducing the purchasing power of consumers worldwide. For the stock market, the immediate aftermath of the tariffs was devastating. The U.S. stock market experienced severe declines during this period. The Smoot-Hawley tariffs are often cited as one of the key catalysts in the downward spiral that led to the global depression.
While the Great Depression was largely a result of protectionist policies, the post-World War II period saw the rise of free trade agreements and efforts to reduce tariffs globally. However, the late 20th century witnessed several key moments of trade tensions that had direct consequences for the stock market.
One of the most notable examples occurred during the 1980s when the U.S. imposed tariffs on imports of steel, Japanese cars, and other goods to protect American industries from foreign competition, particularly from Japan. The stock market responded with volatility as investors feared that these tariffs would provoke retaliatory actions by other nations. For instance, when the U.S. imposed tariffs on Japanese cars, the Japanese government retaliated by restricting American agricultural exports, further exacerbating the trade conflict.
While 1980s tariffs helped protect some domestic industries such as automotive and steel, they contributed to market uncertainty and volatility. However, the overall impact of tariffs on the stock market was muted by strong economic growth and bullish investor sentiment through most of the decade.
One of the most significant impacts of tariffs on the stock market is their ability to alter investor sentiment. Even if the long-term economic effects of tariffs are unclear, the uncertainty surrounding their imposition often leads to short-term market volatility, which markets have experienced over the past several months. Investors may react to tariff announcements with caution, fearing reduced corporate profits, higher prices for consumers, or retaliatory actions from other countries.
Tariffs also have a psychological impact on markets, as they signal a shift away from free trade principles. This can trigger fears of protectionism and lead to a general lack of confidence in the stability of global markets.
The historical impact of tariffs on the stock market reveals that, while they may provide short-term benefits for certain industries, the long-term consequences are often negative. Tariffs tend to disrupt global supply chains, inflate prices, and stifle trade, all of which can harm economic growth. For the stock market, tariffs introduce a high degree of volatility, with investors responding to the immediate and long-term risks associated with protectionist policies.
Of course, to what degree and how long the current imposed tariffs remain in place is yet to be determined. Many experts feel that they are being used more as a short-term negotiation tool than long-term policy. And while the impact of tariffs historically has not been beneficial to the stock market, other factors such as economic conditions (GDP growth, inflation, etc.), corporate performance and earnings, and investor sentiment likely have a bigger impact on the market’s future performance.
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