This article does not aim to relive a déjà vu moment in recent U.S. economic history; rather, it seeks to analyze how past protectionist policies influenced economic growth, inflation, and global trade dynamics—and what valuable lessons they offer for today’s investors.

Over the past century, economic history has been marked by recurring cycles of trade protectionism, economic contractions, and inflationary pressures. Today, the U.S. is experiencing a similar shift under the President Trump administration, where policymakers are once again leveraging tariffs as a key economic strategy. But what can we learn from past trade conflicts, particularly the infamous Smoot-Hawley tariff of 1930, which contributed to economic fragmentation and exacerbated the Great Depression?

For private investors, understanding the historical impact of tariffs is crucial to navigating today’s volatile economic landscape. Trade wars not only reshape global markets but also create new risks and opportunities for investment portfolios.

The last instance of tariffs on such a scale occurred after the passage of the Tariff Act of 1930, known as the Smoot-Hawley tariff, which ignited a trade war between the United States and its allies, exacerbating the Great Depression and fragmenting the global economy into rival blocs (sounds familiar?). Senators Reed Smoot and Willis Hawley proposed the bill to increase taxes on agricultural imports, significantly impacting Canada, as it was America’s largest trading partner. As the Depression worsened, various industries lobbied Congress for greater protections, which heightened Canada’s desire for retaliation, prompting Prime Minister Mackenzie King to raise tariffs on American goods while lowering them for the rest of the British Empire—yes, this actually happened.

The economic challenges of the Depression and the retaliatory tariffs imposed by America’s trading partners eventually led to the Democrats gaining power, with many members skeptical of tariffs. In response, President Franklin D. Roosevelt secured from Congress the authority to negotiate tariff rates with other countries in 1934, initiating a gradual process to reduce trade barriers and improve international economic relations.

The average levy on American imports rose from 40% in 1929 to 60% by 1932, contributing to the unraveling of the global trade system.

Levy on American Imports

Although the Smoot-Hawley tariffs aimed to protect farmers, they expanded due to congressional “logrolling” as representatives sought to benefit local industries. While the direct economic impact of the tariffs may be exaggerated, the overall consequences were severe, leading to the division of democracies into rival trade blocs. The Smoot-Hawley tariffs angered America’s allies, who felt both economically punished and betrayed by an ally.

Economic Impact on Global Trade Dynamics

The past shows that tariffs can lead to global trade fragmentation. Smoot-Hawley catalyzed the division of global economies into competing trade blocs, a risk mirrored today with heightened protectionism. With global supply chains more interconnected than ever, protectionist policies could disrupt trade relationships, leading to increased costs for businesses and consumers alike.

Political Consequences and Anti-American Sentiment

Historical tariffs spurred resentment and political shifts in countries like Cuba and Canada, illustrating how protectionist policies can lead to long-term diplomatic rifts and bolster anti-American movements. Today, similar patterns emerge as key trading partners react to U.S. tariffs with countermeasures, raising the risk of geopolitical tension that could impact multinational investments.

Interplay with Monetary Policy

In the 1930s, tariffs combined with restrictive monetary policies under the gold standard exacerbated economic downturns. Today, while the monetary landscape has evolved, the dollar’s role as the global reserve currency means that aggressive tariff policies could lead to inflationary pressures and trade instability. A strong dollar, coupled with protectionist measures, may discourage foreign investment and complicate monetary policy decisions for the Federal Reserve.

Retaliatory Measures and Trade Barriers

Historically, countries responded to American tariffs with their own barriers, boycotts, and quotas. This reduced U.S. exports significantly, a scenario that may unfold again, affecting American industries and global economic integration. Companies reliant on foreign markets may see decreased demand, prompting investors to reassess their exposure to trade-sensitive sectors.

The Ongoing War in Ukraine and Rising Geopolitical Tensions

The ongoing war in Ukraine and rising geopolitical tensions highlight the fragility of global trade. Just as the Smoot-Hawley tariffs exacerbated international discord, current protectionist measures could further strain alliances, hinder humanitarian efforts, and complicate global supply chains. Moreover, retaliatory tariffs might escalate conflicts, drawing countries into deeper rifts and undermining collaborative responses to crises such as food shortages and energy security.

The Smoot-Hawley Act and Its Fallout

How This Compares to Today:

History offers crucial insights into the unintended consequences of protectionist policies. For private investors, understanding these dynamics is key to mitigating risk and identifying potential opportunities in an increasingly fragmented global trade landscape.

Market Volatility and Investment Strategies
The aftermath of major tariff increases, such as those seen in the 1930s and in more recent trade disputes, has historically led to heightened market volatility. Investors should brace for potential shifts in capital flows and trade adjustments, particularly in industries reliant on international supply chains. Allocating capital toward sectors that benefit from domestic resilience—such as infrastructure, defense, and select consumer goods—could serve as a hedge against volatility.

Sectoral Winners and Losers
Protectionist measures often create economic distortions, disproportionately benefiting some industries while harming others. Manufacturing sectors with strong domestic supply chains may experience temporary gains, while export-heavy industries, particularly in technology, agriculture, and advanced manufacturing, could face significant headwinds. Investors who already have exposure to these sectors should consider hedging strategies, such as diversifying holdings into less tariff-sensitive industries, utilizing options or futures contracts to manage downside risk, and maintaining a liquidity buffer to navigate short-term volatility.

Currency and Inflation Considerations
Historically, trade restrictions have contributed to inflationary pressures, as increased costs from tariffs are often passed down to consumers. The dollar’s status as a global reserve currency means that any trade-induced inflationary surge could have ripple effects across international markets. Investors should consider inflation-hedging strategies, including allocations in commodities, real assets, and inflation-protected securities.

Geopolitical Risk and Portfolio Diversification
As witnessed in the 1930s, protectionist policies can exacerbate geopolitical rifts and realign global alliances. Modern parallels—such as tensions between the U.S. and China—suggest that investment exposure to regions engaged in trade disputes may require reassessment. Geopolitical risk management should be an essential component of investment strategy, with an emphasis on diversified geographic exposure and alternative markets.

Opportunities in Adaptive Industries
While tariff wars create risks, they also generate opportunities. Companies that can navigate shifting trade policies, leverage nearshoring trends, or capitalize on government incentives for domestic production may offer compelling investment cases. Private investors should track policy developments closely to identify emerging winners in the evolving economic landscape.