Fog of trade war | What history teaches us

Published on May 26, 2025

Although often framed as a tool to protect domestic industries and workers, trade restrictions tend to trigger retaliation, disrupt supply chains, and reshape global economic alliances.

The Trump administration’s decision in 2018 to impose tariffs on steel and aluminum imports marked a turning point in modern U.S. trade policy. For decades, the global economy had been moving toward greater integration, but these tariffs—and the retaliatory measures they gave rise to— exposed the fragility of the system.

Even though the overall tariff increase in Trump’s first term was modest—from 1.4% of total imports to 3% by 2021, the U.S.-China trade war that ensued had significant economic repercussions, raising costs for businesses, reducing corporate investment, and distorting global trade flows.

But trade conflicts are not unique to the 21st century. History offers valuable lessons on the economic costs and unintended consequences of protectionism. From the Tariff of 1828, which deepened the sectional divide in the United States, to the Smoot-Hawley Tariff Act of 1930, which worsened the Great Depression, trade wars have frequently exacerbated economic downturns rather than solving the issues they were meant to address.

As trade tensions resurface in 2025, with a plethora of new tariff threats in the Trump administration’s second term, it is crucial to understand these historical parallels – not only to anticipate the economic and market implications but also to recognize patterns of policy mistakes that could be avoided.

Global trade: a historical perspective

The post-1970s global economy: the era of trade liberalization

The modern era of globalization began in the 1970s, driven by technological advancements, reduced trade barriers, and pro-market economic reforms. Over the next five decades, this shift transformed the global economy, allowing countries to specialize in areas of comparative advantage, enhancing productivity, and fostering economic interdependence.

Several milestones defined this period:

• 1995: The creation of the World Trade Organization (WTO) in institutionalized global trade rules, making disputes more manageable.
• 2021: China’s accession to the WTO was a pivotal moment, leading to an explosion in global trade flows.
• 2000s: Average U.S. tariffs fell dramatically, declining from more than 30% in the early 20th century to low single digits.

These developments helped fuel economic growth worldwide, lifting hundreds of millions out of poverty and dramatically expanding global supply chains. But they also created vulnerabilities, particularly for regions and industries exposed to outsourcing, offshoring, and competitive wage pressures. The trade conflicts of the 2010s – and potentially the 2020s – can be seen as political responses to these disruptions.

The benefits of trade: a counterpoint to protectionism

Throughout history, trade has been one of the most powerful drivers of economic prosperity. It has:

• Lowered costs for consumers by allowing efficient global production.
• Fostered competition and innovation, forcing firms to improve productivity.
• Enabled rapid industrialization in countries such as South Korea, Singapore, and China, turning them into global economic powerhouses.

Countries that embraced trade saw significant improvements in their economic output and living standards, whereas those that erected barriers often stagnated. Thus, history overwhelmingly favours open trade over protectionism, even as political cycles sometimes push nations in the opposite direction.

Trade agreements: building blocks of economic integration

Trade wars may dominate headlines, but trade agreements are the foundation of economic cooperation.

The North American trade landscape evolved over decades, with three major agreements shaping the region’s economic trajectory:

1. The Canada-U.S. Free Trade Agreement (1988) – A landmark deal that set the stage for deeper North American economic integration.

2. NAFTA (1994) – Expanded free trade to include Mexico, eliminating most tariffs and boosting supply-chain interconnectivity.

3. USMCA (2020) – Modernized NAFTA, introducing new rules on labour, digital trade, and auto manufacturing.

Each step deepened economic ties but also created political friction over perceived job losses, trade deficits, and regulatory differences. As the risk of a new trade war emerges, these agreements become even more critical. They provide legal frameworks that protect against extreme policy swings, ensuring a baseline of stability for businesses making longterm investment decisions. They also provide leverage for countries to negotiate trade disputes through structured mechanisms rather than retaliatory tariffs.

Should trade tensions escalate again, the obvious question will be whether these agreements are strong enough to withstand the pressure. Some damage may have already occurred: The Trump administration’s apparent disregard for the legal framework of the USMCA is likely to have a cooling effect on investment decisions throughout North America.

Lessons from the past: when protectionism backfires

Despite the political appeal of tariffs, history has repeatedly shown that protectionism often does more harm than good.

Three key episodes highlight this pattern:

1. The Tariff of 1828: a lesson in unintended consequences. Also known as the Tariff of Abominations, this law imposed extraordinarily high duties to protect U.S. manufacturers. It benefited the industrial North but deeply hurt the agricultural South, which relied on trade with Britain. The backlash led to the Nullification Crisis of 1832, foreshadowing the tensions that would later erupt into the Civil War.

Takeaway: Tariffs can exacerbate internal divisions, making them as much a political risk as an economic one.

2. The Smoot-Hawley Tariff Act (1930): making a crisis worse. Designed to protect U.S. farmers and manufacturers during the Great Depression, it raised tariffs on more than 20,000 goods. Other countries retaliated, leading to a 65% decline in global trade and worsening the Depression. The Act is widely seen as one of the most damaging trade policies in U.S. history.

Takeaway: In times of economic stress, protectionism often deepens recessions rather than alleviating them.

3. The 2018 trade war: a case study in market disruption. The Trump administration, imposed tariffs on $250 billion worth of Chinese goods, citing intellectual property theft and unfair trade practices. China retaliated, targeting U.S. agriculture and manufacturing. The result? Higher costs for U.S. businesses, market volatility, and disruptions in global supply chains.

Takeaway: Even when tariffs aim to correct real imbalances, they often introduce more uncertainty than solutions.

The U.S. economy: this is not 2018

Trade tensions are resurfacing in an economic landscape distinctly different from that of 2018. Back then, inflation was at target, and the U.S. economy had been running under its potential for years after the global financial crisis (GFC).

Donald Trump’s key policy was substantial tax cuts, which stimulated the U.S. economy, boosting the ISM manufacturing index to almost 60. Even with the tax cuts, the U.S federal government deficit was a manageable 3.5%, and the household sector had a significant buffer, with a savings rate of more than 5.7%.

In 2025, the U.S. economy is running hot, with core inflation exceeding 3%, and the 2% inflation target was last reached in 2021. The manufacturing sector does not have the same momentum, as evidenced by manufacturing PMIs close to 50, and there are no substantial tax cuts coming, with the deficit now pushing toward 8%. Household savings, at 3.8%, are also low by historical standards.

With the U.S. economy constrained by high inflation and a high government deficit, there is little room for error. If we add the Fed’s higher-for-longer policy, resulting in tighter financial conditions, the buffer against trade shocks is diminishing.

The economic considerations listed above might not be sufficient to convince President Trump that his trade policies are ill-advised and poorly timed, but they should be enough to convince investors that the Trump administration is playing a risky game, and that a fair amount of uncertainty should be injected into any investment view until more clarity is provided.

For now, the repeated strategy of tariff threats followed by implementation delays has been met with cautious optimism from market participants, but it creates the risk of complacency in the face of danger.

Conclusion

History is clear: Protectionism carries significant economic risks. Even though tariffs may be framed as defensive measures, they often spiral into retaliatory actions, disrupting trade, increasing costs, and ultimately slowing growth.

As policymakers reconsider trade strategies, the lessons of the past should serve as a warning: in the pursuit of economic strength, trade wars often weaken the very economies they aim to protect.