The most important and generally misunderstood aspect of tariffs is their impact on the stock market. History has shown that tariffs can cause immediate market corrections and destroy investors’ capital. They also turn against American manufacturers and consumers.

Tariffs can target foreign companies and governments, but their domestic consequences are often much greater. Supporters of protectionist measures on steel, lumber, electric vehicles and other products fail to understand that everyone who invests in the stock market has suffered losses because of this policy. It’s not just about 60 percent of Americans who own stocks directly, often in their 401(k)s and individual retirement accounts, union pensions and teacher retirement plans will also be affected. The minor increase in price protection for some industries is more than offset by the trillions gutted from market capitalization in major indices and the dislocation of the national economy.

Depending on the economist or analyst, assessments of the new policy proposals vary on the inflationary impact of tariffs on the American family. Estimates range from an annual impact of a few hundred dollars to well over $1,000. Worse, once U.S. tariffs are in place, foreigners routinely retaliate against U.S. exporters, leading to further declines in profits and stock prices. Material shortages and job losses ensue.

Markets respond to tariffs. Three examples show historical madness.

In 1928, Herbert Hoover campaigned on a protectionist platform to support American agriculture. As the tariff movement grew after his election, many industries supported the levy. It grew to include a tax on 25,000 imported products. In October 1929, rumors spread that the tariff bill might fail, which Senator Reed Smoot of Utah quickly rejected.

The stock market collapse began on October 28, 1929, when news spread that the Smoot Hawley tariff bill was going to become law. The front-page article in the New York Times said: “Leaders insist on passing tariffs. » Although the tariff bill did not come into force until June 1930, its effects were felt eight months before. Markets immediately reacted by discounting future earnings. Most economists attribute the crash to the gold standard, but this analysis ignores the forward-looking nature of the human mind, which is the market itself. Markets do not need to wait for profits to decline due to impending policies that will result in future losses. Hence the rapid nature of the crash. The use of leverage in the 1920s exacerbated the crash. Margin calls were made, further upsetting the markets.

Once the bill became law, other countries fought back. The agricultural sector was among the worst affected, as farmers could not export their crops competitively. Hoover followed up with the Revenue Act of 1932, raising taxes amid economic collapse. In 1934, world trade abandoned 66 percent, back to 1905 levels. The Great Depression continued, increasing economic nationalism, allowing radicals to rise to power, resulting in World War II. The adage has proven true: when goods cannot cross borders, armies will.

Much later, at the dawn of a new century, protectionist hawks still believed that tariffs protected American jobs. Recent history shows the opposite. President George W. Bush imposed tariffs on steel on March 20, 2002. According to the Bureau of Labor Statistics, from March 2002 to March 2003, the manufacturing sector lost 475,000 jobs, more than existed in the entire steel industry. Manufacturers were unable to pass on rising steel prices to their customers because many fixed contracts prohibited price increases.

The tariff had an impact on the performance of the stock market. This fact often goes unnoticed due to the focus on the collapse of Internet companies over the previous two years. From March 2002 to May 2003, with the implementation of tariffs, the S&P 500 lost $2 trillion in market capitalization. The Dow Jones Industrial Average reached a post-September level. 11 2001, peak March 19, 2002 at 10,635.25. The steel tariffs took effect the next day. Tariffs on lumber followed in May. The Dow Jones did not fully recover until steel tariffs were lifted on December 4, 2003. The Bush administration lifted the tariffs after learning that the European Union would retaliate. Had this been the case, the U.S. stock market could have suffered another severe downturn, as it did in 1929.

Under the Trump administration, the stock market peaked in January 2018, when President Trump announced tariffs on China. China responded in kind. He also imposed prices on steel and aluminum imports from around the world, including Mexico, Canada and the European Union. Canadian lumber has also been subject to tariffs, causing domestic prices to rise. The market pulled back and didn’t reach its January high until August 2018. A slight setback, but a setback nonetheless.

As the November 5 election approaches, both parties are quietly grappling with the nightmarish reality: The government is paying $2 million a minute in interest to finance the national debt. The Republican Party’s most recent policy proposal is to replace part of the current income tax with 10 percent tariffs on all goods and services entering the United States. Democrats also favor tariffs, with the Biden administration retaining most of Trump’s tariffs and having recently instituted them. 100% tariffs on electric vehicles from China. Vice President Kamala Harris is expected to continue this policy if she wins. Most observers believe that the customs duties will be paid by the country exporting the product to our country, but this is not the case. Domestic consumers pay most tariffs, including on raw material imports, because they are imposed by the U.S. government at the port of entry. No one doubts that there are many bad actors on the world stage. We must address the behavior of China and other countries, including devaluing their currencies and subsidizing their own industries to unfairly compete with American companies. Free trade must be fair trade.

Free markets and commerce require a rigorously enforced honor system by existing bodies, developed to resolve disputes before panels rather than on battlefields. If a nation violates established rules of fairness and integrity, it must do something about it. Denial of market access, import quotas, loss of most favored nation trading status, expulsion from the World Trade Organization and repeal of foreign aid are just a few. one of the many options.

Tariffs are backfiring on American investors, consumers and businesses. A repeat of the failed trade policies of the past will only lead to lower stock market performance and massive economic distortions.

This article was originally published in Barron’s on September 19, 2024.