Tariffs Are Back... And That Could Spell Disaster

The U.S. is playing a dangerous game with tariffs...

News of America's far-reaching trade threats seems to change every day. Just weeks ago, the White House floated sweeping tariffs on both Canada and Mexico – putting pressure on major trading partners to concede to U.S. demands.

At the same time, Washington is ramping up tariffs on Chinese goods in what looks like a renewed escalation of the trade war.

This is far from the first time the U.S. has wielded tariffs as an economic weapon. Nearly a century ago, the government did something similar with the Smoot-Hawley Tariff Act.

And as we'll explain, the results weren't what lawmakers intended...

The Smoot-Hawley Tariff Act of 1930 was meant to protect American farmers from foreign competition...

But once it passed, it quickly spiraled into a broader trade war that devastated U.S. allies.

Canada was hit especially hard. Nearly 20% of all U.S. exports went to Canada at the time, making it the country's biggest trade partner.

In response to Smoot-Hawley, Canada retaliated with its own tariffs... cutting off key exports from the U.S. And by 1932, U.S. exports to allied nations had plunged by more than 60%, sending many of their economies – Canada's included – into crisis.

Unemployment soared. With citizens desperate for relief, political pressure to embrace communist policies gained momentum.

Meanwhile, in Cuba, the economic downturn contributed to Fulgencio Batista's 1933 coup. That power shift would eventually pave the way for Fidel Castro's rise to power, reshaping U.S.-Cuba relations to this day.

In short, while Smoot-Hawley didn't collapse the U.S. economy... it created long-term instability for key allies.

Today's economy is even more interconnected – so the risk could be even higher...

The U.S. was more self-sufficient in the 1930s. Today, American companies rely on global supply chains... meaning the impact of aggressive tariffs won't just be felt abroad.

Broad tariffs will raise U.S. import costs. That means higher prices for businesses and consumers.

The last time the U.S. imposed major tariffs on China in 2018, it cost American businesses and consumers an estimated $80 billion. Many of those tariffs are still in place today.

A new round of trade restrictions could send inflation surging again – just as the Federal Reserve tries to keep it under control.

For now, the U.S. consumer seems to be holding up...

But another surge in prices could erase much of the progress the economy has made in the past few years.

Investors should look out for signs of weakness. Consumer resilience has been the backbone of the economic recovery. But trade wars don't happen in a vacuum.

If tariffs continue to escalate, businesses that rely on global supply chains will be forced to raise prices. That will put pressure on profit margins and consumer spending... two critical drivers of market performance.

The next few months will be crucial in determining whether the U.S. is moving toward an extended trade war – or if these threats are simply a negotiating tactic.

We'll be watching closely.

Regards,

Joel Litman
February 24, 2025