Introduction
Since President Trump took charge of the Oval Office, “Tariff” has become a frequent buzzword among investors, citizens, and global leaders. Tariffs are one of the oldest tools in a nation’s economic playbook. However, their effects go far beyond trade policy—they ripple through stock markets, international currency flows, and the portfolios of everyday investors.
In this article, I’ll share my personal viewpoint on this topic and conclude with what I believe are the best strategies Canadian investors can adopt in response.
Disclaimer: I am not a financial advisor. The views expressed here are based on my own research and interpretation. Please do your own due diligence and consult a certified financial advisor before making any financial decisions. Feel free to share this article with your advisor for a more tailored perspective.
What Economic Theory Says About Tariff Hikes
Classical economic theory suggests that tariffs:
- Distort market efficiency
- Reduce overall consumer welfare
- Trigger retaliatory trade measures
- Raise prices for consumers
- Reduce consumer surplus
- Benefit domestic producers (short-term)
- Generate government revenue
- Introduce deadweight loss due to inefficiencies
Let’s break this down into a simple chain of events.
In a free market, global prices are set by supply and demand. Tariffs artificially raise these prices by imposing additional fees on importers, which are almost always passed on to the consumers. As a result:
- Purchasing power declines – consumers pay more for the same product.
- Consumer demand drops – discouraging importers from sourcing abroad.
- Domestic production becomes more attractive – encouraging local businesses to fill the gap, which may appear as a short-term gain.
However, this comes with serious long-term consequences.
As prices rise, workers demand higher wages. As a result, domestic production cost increase, and again businesses pass on these additional costs to the consumers. If consumers still don’t buy, then businesses start to lay-off workers, and unemployment raise. If unemployment is high then businesses start to exploit cheaper labors, which leads to further reduction in purchasing power, consumption, and in worse case bankruptcy.
On the flip side, successful domestic producers may become monopolies and arbitrarily hike prices (for essential products).
Either way, consumers lose.
To make matter worse, over time, other countries retaliate with counter-tariffs, which shrinks export markets further and reduce revenues.
All combined, a once-thriving economy can quickly face stagnation as a result.
Historical Analysis of Tariff Hikes
In past 100 years the world has experienced two of such tariff hikes from the U.S. government.
The Smoot-Hawley Tariff Act (1929–1930)
To protect local farmers and manufacturers during the Great Depression, the U.S. raised tariffs on over 20,000 imported goods.
Result:
- Retaliation from countries like Canada, France, and the UK
- Global trade fell by 66% between 1929 and 1934
- Action that deepened and prolonged the Great Depression
- Widely considered a policy disaster by economists
The U.S.-China Trade War (2018–2019)
In 2018, President Trump imposed tariffs on China (and Canada), citing national security and unfair trade practices. Tariffs were initially imposed on Steel, Aluminum and then expanded to dairy and other goods as well.
Short-term gains:
Tariff revenue increased:
- $34.6B in 2017
- $41.3B in 2018
- $71B by 2019
But then came retaliation:
- China responded with tariffs on soybeans, pork, dairy, and auto parts
- U.S. agricultural exports to China dropped from $19.4B to $9.1B
- Markets like soybeans were never fully recovered
- U.S. government spent billions in subsidies
- Inflation hit consumers (cars, washing machines, etc.)
Cost vs. Revenue Summary
| Category | Approximate Amount |
|---|---|
| Tariff Revenue | +$140B–$150B |
| Farmer Subsidies | -$50B–$51B |
| Export Losses | -$60B–$90B |
| Indirect Costs (Inflation, inefficiency, GDP loss) | -$80B–$120B |
| Net Impact (loss) | -$50B to -$120B |
Despite significant revenue, the net outcome was a loss—both financially and in overall economic output.
It was less about generating revenue and more of a political strategy with heavy economic consequences, especially for farmers, exporters, and consumers.
Impact on the Stock Market
2018 Highlights
- January: Market rallies to record highs
- March: Steel/aluminum tariffs announced → market dips
- June–July: $34B in tariffs imposed; China retaliates → increased volatility
- Q4: Worst December since the Great Depression:
- S&P 500: -14%
- Dow Jones: -5.6%
- Nasdaq: -3.9%
Main issues: Trade tensions, interest rate hikes, slowing global growth
2019 Highlights
- Early 2019: Fed eases policy → investor optimism
- May: Trump raises tariffs to 25% on $200B of Chinese goods → market dip
- August: Yield curve inverts → recession fears
- December: “Phase One” trade deal → markets rally
- S&P 500: +28.9%
- Dow Jones: +22.3%
- Nasdaq: +35.2%
Despite trade war turbulence, monetary policy and trade optimism pushed markets up.
Yearly Market Summary
| Index | 2018 | 2019 |
|---|---|---|
| S&P 500 | -6.2% | +28.9% |
| Dow Jones | -5.6% | +22.3% |
| Nasdaq | -3.9% | +35.2% |
While tariffs can damage short-term confidence, markets tend to rebound once uncertainty fades.
What Should Canadian Investors Do?
Based on all the data above, I’ve decided to increase my retirement portfolio exposure to U.S. index funds, specifically the S&P 500.
Becasue two points are clear from these data:
1) Tariff are not sustainable in long run.
2) Market will go up as soon as this decision reverses.
Canadian ETF Options:
- Unhedged ETFs (e.g., VFV, ZSP, QQC): Best if the CAD weakens
- Hedged ETFs (e.g., XSP, ZQQ, ZDJ): Best if the CAD strengthens
Historically, when tariffs hit Canadian exports, the CAD weakens, making unhedged ETFs more profitable. That’s why I’m leaning toward VFV.
If you’re into individual stocks, remember that auto and agriculture sectors are usually hit harder than tech during trade wars. Even though this this AI is also part of the equation. Consult with your financial advisor for more insight.
Final Thoughts
Tariffs are powerful—but come at a cost. Whether you’re an investor or an economist, understanding how trade wars ripple through markets, currencies, and history can help you make smarter decisions.
I hope this article gives you some direction and confidence on your next steps.
Yes, the market is volatile—but that’s the beauty of investing. When the streets run red, you take action based on lessons from the past.
I see market volatility as an opportunity, not a threat. Trump won’t be president forever, and investing in index funds gives me peace of mind—I’m backing 500+ strong U.S. companies, and not betting on a single stock.
Plus, this strategy helps me maximize my employer’s matching contributions and stay committed to my long-term goals. With 30+ years ahead, I believe I’m heading in the right direction.
What do you think?
Do you agree or disagree with my view? Let me know in the comments below!
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Have a wonderful day ahead!
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