Trade wars: What history teaches us

Pierre: Welcome to iA Financial Group’s “In Your Interest!” podcast. My name is Pierre Dolbec and I’m joined by my colleague and chief strategist, Sébastien Mc Mahon. Hi, Sébastien.

Sébastien: Hello, Pierre. How are you?

Pierre: I’m good. How are you?

Sébastien: I’m good, I’m good.

Pierre: Sébastien, during the last episode, we discussed the trade war between the United States and Canada. And since history is often an excellent teacher, today we’re going to look at and address the trade war from a historical perspective. What do you say if we begin by talking about the justifications for a country to enter a trade war against another country?

Sébastien: Yes, sure. So, few policy decisions have the far-reaching consequences that a trade policy can have. So, 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. So, 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 towards greater integration, but these tariffs and the retaliatory measures that they gave rise to exposed the fragility of this system. So even though the overall tariff increase in Trump’s first term was modest, from 1.4% of total imports to 3% in 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 of unintended consequences of protectionism. From the tariffs of 1828, which deepened the sectional divide in the U.S. to the Smoot-Hawley Tariff Act of the 1930s, which worsened the Great Depression, you know, trade wars have frequently exacerbated economic downturns rather than solving the issues they were meant to address.

Pierre: And as trade tensions resurface in 2025, with numerous new tariff threats in the Trump administration, it’s 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. Sébastien, can you tell us about global trade from a historical perspective?

Sébastien: Yeah, sure. So, the last 50 plus years were historical. The modern era of globalization began in the 1970s, driven by technological advancements, reduced trade barriers and pro-market economic reforms. And over the next five decades plus, this shift transformed the global economy, allowing countries to specialize in areas of comparative advantage, enhancing productivity and fostering economic independence. So, a few milestones from this period:

The first one would be the creation of the World Trade Organization—or the WTO—in 1995, which institutionalized global trade rules, making disputes more manageable. But now, we’re at a risk of seeing the U.S. exiting the WTO. So, let’s see what kind of role this can play in today’s world.

China’s accession to the WTO in 2001 was a pivotal moment, leading to an explosion of global trade flows, and the average U.S. tariffs fell dramatically over the last decade—the last century rather—declining from more than 30% in the early 20th century to low single digits by the 2000s.

So, these developments helped fuel economic growth worldwide, lifting hundreds of millions of people 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 and the trade conflict of the 2010s and potentially the 2020s can be seen as a political response to these disruptions.

Pierre: And we sense a rise in protectionism in the United States behind slogans aimed at restoring America to its former greatness, without necessarily being too specific about which era is being referred to. What are the advantages of trade that can counterbalance such intentions?

Sébastien: Yeah. Throughout history, trade has been one of the most powerful drivers of economic prosperity. It lowered costs for consumers by allowing efficient global production. It fostered competition and innovation, forcing firms to improve productivity, and it enabled rapid industrialization in countries such as South Korea, Singapore and China, turning them into global economic powerhouses. Countries that embraced trade saw a significant improvement in their economic output and standards of living, whereas those that erected barriers often stagnated. So, history’s overwhelmingly favouring open trade over protectionism, even as political cycles sometimes push nations in the opposite direction.

And, you know, among all of this, the building block is truly the trade agreements that we’ve seen through history. And maybe if we focus on North America, the three most important ones, of course, are the Canada-U.S. Free Trade Agreement of 1988. It was the landmark deal that set the stage for deeper North American economic integration. We had NAFTA, so, the North American Free Trade Agreement of 1994, which expanded free trade to include Mexico, eliminating most tariffs and boosting supply chain interconnectivity. And of course, the USMCA, which is the modernized version of NAFTA of 2020, introducing new rules on labour, digital trade and auto manufacturing.

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

Pierre: And now that we’ve discussed the benefits of trade, what has the past shown us about the risks of protectionism?

Sébastien: Yeah. Despite the political appeal of tariffs, history has repeatedly shown that protectionism often does more harm than good. And maybe we can focus on three key episodes here to highlight this:

First will be the tariff of 1828 that was put in place in the U.S. It’s now called the Tariff of Abominations because it had such far-reaching consequences. This law imposed extraordinarily high duties to protect U.S. manufacturers. It benefited the industrial north, but it deeply hurt the agricultural south in the U.S., which relied on trade with Britain. So, the backlash led to the Nullification Crisis of 1832 and foreshadowing the tensions that would later erupt into the Civil War. So, the takeaway here is that tariffs can exacerbate internal divisions, making them as much a political risk as an economic one.

The second episode would be the Smoot-Hawley Tariff Act of 1930, making a crisis worse because it was designed to protect U.S. farmers and manufacturers during the Great Depression, and it raised tariffs on more than 20,000 goods. So, remember that in 1930 we had the recession, a financial crisis. But these tariffs made the crisis become the Great Depression that we know now because other countries retaliated, leading to a 65% decline in global trade and worsening the depression. So, the act is widely seen as one of the most damaging trade policies in U.S. history. So, the takeaway here is that in times of economic stress, protectionism often deepens recessions rather than alleviating them.

And the last one, the most recent one, the 2018 trade war, much less biting in terms of examples, but still, the Trump administration then imposed tariffs on $350 billion worth of Chinese goods, citing intellectual property theft and unfair trade practices. China retaliated, targeting U.S. agriculture and manufacturing, and the result was higher costs for U.S. businesses, market volatility and disruptions in the global supply chain. So, the takeaway here is that even when tariffs aim to correct real imbalances, they often introduce more uncertainty than solutions.

And this one was in 2018. Now, we’re in 2025. The economy is very different now than it was then. In 2018, inflation was at its target level. The U.S. economy was operating below its potential. Trump’s key policy was significant tax cuts, which were financed by debt eventually, but it did boost the economy at the same time that we had a tariff. So, it acted as a counterweight. The federal deficit was manageable at 3.5% then. Household savings rate was high at 5.7%. Now, in 2025, it’s almost a reverse situation. The economy is in a state of excess demand, so it’s overheating, with underlying inflation at 3%. The 2% inflation target was last achieved in 2021. The manufacturing sector lacks momentum. There are no substantial tax cuts that are planned. The deficit is around 8%. The household savings rate is low compared to historical standards at 3.8%. So, if you put all of this together, can the U.S. economy handle such a shock in 2025? Well, the answer is likely not.

Pierre: Well, it was very interesting to look at trade wars from a historical perspective, Sébastien. What would be your final word before concluding the podcast?

Sébastien: Yeah. I would say that history is pretty clear: protectionism carries significant economic risks. And even though tariffs may be framed as defensive measures, they often spiral into retaliatory actions, disrupting trade, increasing costs and ultimately slowing growth. So, as policymakers consider 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 that they aim to protect.

Pierre: Well, thank you, Sébastien. That’s all for today. Thanks to our listeners as well. See you in two weeks’ time for the next episode of the “In Your Interest!” podcast.

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