Trade Wars Come With A Price, And Investors May Already Paying It

Introduction to the Tariff Debate: A Historical and Modern Perspective

The debate over tariffs has long been a contentious issue in economic policy, with both historical and contemporary implications. This article explores the historical context of the McKinley Tariff Act of 1890 and draws parallels with current trade policies under former President Donald Trump. By examining the unintended consequences of tariffs, the article aims to provide insights for investors and policymakers on the broader impact of such measures. The historical lessons from the McKinley era offer a cautionary tale about the complexities of protectionist trade policies, while the modern-day analysis highlights the ongoing relevance of these issues in shaping economic outcomes.

The McKinley Tariff Act of 1890: A Historical Case Study

In 1890, then-Representative William McKinley championed the McKinley Tariff Act, which raised import duties to an average of 50%, one of the highest levels in U.S. history. The logic behind this aggressive tariff strategy was straightforward: by making foreign goods more expensive, Americans would be incentivized to buy domestic products, thereby fueling economic expansion. However, the results were far from straightforward. Instead of strengthening America’s trade position, the tariff led to retaliation from other nations, higher prices for consumers, and significant political backlash. The consequences were swift and severe: McKinley lost his congressional seat in the 1890 midterm elections, and Democrats gained control of the House of Representatives.

The McKinley Tariff also had an unexpected impact on U.S.-Canada relations. At the time, some Republicans believed that economic pressure from the tariff might persuade Canada to seek statehood or deepen its economic ties with the United States. Instead, the opposite occurred. Canadian nationalists interpreted the tariff as economic coercion, leading to a surge in anti-American sentiment. Canada strengthened its ties with the British Empire, reinforcing trade barriers and reducing its economic dependence on the United States. This historical episode underscores the complexities of using tariffs as a tool for economic or political leverage.

Echoes of the Past: Tariffs, Trade Deficits, and Consumer Confidence Today

Fast-forward to the present day, and there are striking similarities between the economic policies of the McKinley era and those of former President Donald Trump. Trump’s trade strategy, which included imposing tariffs on imported goods, was designed to bring jobs back to the U.S., reduce the trade deficit, and assert American economic dominance. However, history suggests that tariffs often fail to achieve their intended goals and may even exacerbate trade imbalances. Data from the Peterson Institute for International Economics indicates that countries with higher tariffs tend to have larger trade deficits, not smaller ones. This is because tariffs discourage trade on both sides, leading to fewer exports and imports.

The consequences of these trade policies are evident in the data. Consumer confidence, a key indicator of economic health, has been declining in recent months. The Conference Board’s consumer confidence index dropped seven points in February, marking the largest decline since August 2021. Businesses are also feeling the pinch, with many warning that higher tariffs will lead to increased costs and reduced profitability. For example, HP Inc., a leading manufacturer of personal computers and printers, cited U.S. tariffs on Chinese goods as a significant challenge during its recent earnings call. These developments suggest that the economic landscape is becoming increasingly uncertain, with tariffs serving as a major flashpoint.

How Investors Should Think About Tariffs: Lessons from History

When evaluating the impact of tariffs on the economy and financial markets, it is essential for investors to approach the issue with a clear-eyed perspective. Tariffs are often framed as a tool for protecting domestic industries or reducing trade deficits, but their actual effects can be far more complex and nuanced. Here are three key considerations for investors when assessing tariffs:

1. Tariffs Are a Tax—and Taxes Raise Costs: Regardless of who initially bears the cost of tariffs—whether it is foreign exporters or U.S. importers—the additional expense ultimately gets passed on to American consumers. This dynamic was evident in the aftermath of the McKinley Tariff, when companies across multiple industries raised prices for everything from clothing to clocks. Today, businesses are similarly warning about price hikes on a wide range of goods, from electronics to automobiles. Over time, these higher costs can weigh on economic growth and reduce consumer spending.

2. Trade Volatility Hurts Business Confidence: Unpredictable trade policies, including sudden changes in tariffs, create uncertainty for businesses. This can lead companies to hesitate when making long-term investments, delaying capital spending and slowing hiring. In some cases, businesses may seek to mitigate risks by shifting supply chains out of affected regions or investing in automation rather than hiring more workers. Investors should pay close attention to sectors that are most exposed to trade volatility, such as automotive, manufacturing, and energy. In these industries, companies may explore mergers and acquisitions (M&A) or other strategic initiatives to hedge against trade-related risks.

3. Global Trade Relationships Matter: Canada serves as a prime example of how tariffs can strain relationships with key trading partners. As the United States’ largest trading partner, Canada accounted for $413 billion in U.S. imports and $349 billion in exports in 2024. The U.S. also relies heavily on Canada for energy imports, including crude oil, natural gas, and electricity. Aggressive trade policies, such as tariffs, can have unintended consequences, pushing Canada and other key partners to seek alternative trade arrangements. Several Canadian politicians are now advocating for new pipelines to coastal export terminals, which would reduce Canada’s dependence on the U.S. market. Once these trade routes are established, they are unlikely to be reversed easily. This dynamic highlights the importance of maintaining strong, stable trade relationships with key partners.

Investing Without Bias: Evaluating Policies Based on Their Effects

The lessons from the McKinley Tariff and the current trade landscape are clear: tariffs often come with unintended consequences, and their impact on the economy and financial markets can be profound. This is not to say that tariffs are inherently bad or that President Trump’s trade policies are entirely without merit. Rather, the key takeaway for investors is the importance of evaluating policies based on their actual effects, rather than their stated goals. History has shown time and again that tariffs can lead to higher consumer costs, slower economic growth, and increased trade volatility.

Investors would do well to approach tariffs with a critical perspective, avoiding the temptation to align their investment strategies with partisan ideologies. Markets thrive on certainty, and tariffs introduce uncertainty into the economic equation. While tariffs may provide short-term benefits to specific industries, their long-term impact often proves detrimental to broader economic growth. As the McKinley era demonstrated, even the most ardent supporters of protectionist trade policies may eventually come to recognize the value of more pragmatic approaches, such as reciprocal trade agreements. For investors, the challenge is to remain vigilant, to think independently, and to base their decisions on a clear understanding of the economic realities at play.

Conclusion: Learning from History to Navigate the Future

The story of the McKinley Tariff Act of 1890 serves as a powerful reminder of the complexities of trade policy and the unintended consequences of tariffs. While the specifics of the economic landscape have changed dramatically over the past century, the fundamental lessons remain the same. Tariffs are a blunt instrument that can disrupt trade relationships, raise consumer costs, and create uncertainty for businesses and investors. As the United States navigates the challenges of the 21st-century global economy, these lessons could not be more relevant.

Today’s policymakers and investors would do well to heed the warnings of history. By adopting a more pragmatic and bipartisan approach to trade policy, the U.S. can avoid repeating the mistakes of the past and work towards creating a more stable and prosperous economic future. As former President William McKinley eventually came to recognize, the pursuit of protectionist trade policies often leads to unintended consequences. The shift towards reciprocal trade agreements in the years following the McKinley Tariff represents a valuable lesson in economic pragmatism—a lesson that remains just as relevant in the modern era. As Mark Twain once quipped, “History doesn’t repeat itself, but it often rhymes.” For investors, the challenge is to listen to the rhyme and make informed decisions based on the lessons of the past.