Trade Wars: What They Are, Why They Happen, and How Investors Can Navigate Them

A trade war occurs when countries impose tariffs or other trade barriers on each other to protect their own economies. It often starts with one nation trying to correct what it sees as unfair trade practices, triggering additional retaliatory measures from the other side. These measures tend to escalate until both sides decide to resolve the dispute through negotiation (usually through a third party mediator).

Trade Wars and Trade Disputes are very similar, with the main difference being the level of retaliatory measures. Disputes are usually so named when the moniker ‘war’ seems too hyperbolic for the situation. (Although, of course, trade disputes could turn into trade wars.)

• Tariffs: Taxes on imports, making foreign goods more expensive.
• Quotas: Limits on the quantity of goods that can be imported.
• Retaliatory Measures: Counteractions taken by affected countries, often escalating the conflict.

These measures disrupt international trade and can have a domino effect across sectors and supply chains.

While the mechanics of trade wars have existed for centuries, the term “trade war” first gained traction in the 20th century, particularly in reference to tariff battles between industrialised nations. In fact, the First Anglo-Dutch War in 1653 can be attributed to disputes over trade.

One of the earliest documented uses of this term dates back to the 1930s, when the Smoot-Hawley Tariff Act became a poster child for protectionist policy gone wrong. Designed to shield American farmers during the Great Depression, it ended up triggering retaliatory tariffs from over 25 countries—exacerbating global economic turmoil.

Since then, several significant trade wars have reshaped global markets:

• The Chicken War (1960s) – A quirky but real dispute between the U.S. and Europe over poultry tariffs. The U.S. retaliated by taxing European light trucks, a tariff still in place today—affecting modern automakers.
  
• U.S.-Japan Trade Tensions (1980s) – Amid rising concern over Japan’s growing automotive and tech exports, the U.S. imposed tariffs and negotiated voluntary export restraints. The standoff led to structural shifts in global manufacturing, including the rise of Japanese factories on U.S. soil.
  
• U.S.-China Trade War (2018–2020) – One of the most economically impactful trade wars in modern history. Sparked by issues like intellectual property theft, forced tech transfers, and a ballooning trade deficit, this conflict resulted in tariffs on over $550 billion worth of goods and rattled global supply chains.
  
• Trump Tariffs Taken Further (2025+) – As of May 2025, the U.S. is again engaged in major trade disputes, most notably with China. A 34% tariff on all Chinese imports has triggered Chinese retaliation, including rare-earth export restrictions. Though a 90-day truce has eased some tensions, average U.S. tariffs remain elevated at around 40%. The U.S. has also imposed tariffs on imports from Mexico and Canada—25% on most goods, 10% on energy—which prompted swift retaliatory tariffs on over $100 billion worth of U.S. exports. These actions have fuelled global uncertainty. The EU has cut its growth forecasts due to trade disruptions, and U.S. markets are feeling pressure from rising costs and strained supply chains.

These episodes show that trade wars rarely resolve cleanly. They tend to create ripple effects—some lasting years, others decades—affecting everything from consumer prices to international diplomacy. In these situations, investors should brace for volatility and monitor policy signals closely.

Trade wars are rarely about a single issue. More often, they reflect broader political and economic tensions.

Political Motives Governments may initiate trade wars to protect domestic industries, create leverage in trade negotiations, or appeal to nationalist sentiments. For instance, imposing tariffs on steel can be a way to support local manufacturers and preserve jobs.

Economic Triggers Common economic drivers include:

• Trade Imbalances: When a country imports more than it exports, it may seek to reduce the gap by discouraging imports.
  
• Currency Manipulation: Accusations that a trading partner is deliberately weakening their currency to make exports cheaper.

Trade wars rarely unfold in a vacuum. Instead, they ripple across the global economy—disrupting industries, shifting supply chains, and creating volatile conditions that investors can’t afford to ignore.

1. Stock Market Volatility
Trade war headlines are market movers and can trigger sharp, often unpredictable, swings in stock prices. Sectors most exposed to international trade—like manufacturing, agriculture, and tech—can see sudden sell-offs, leading to broader market downturns. For active investors, this creates both risk and opportunity: the volatility can erode short-term value, but also open doors for value investing or tactical reallocations.

2. Inflation and Consumer Prices
When tariffs hit essential imports—components, raw materials, or finished goods—the costs usually don’t stop at the factory floor. They pass through the supply chain and land squarely on consumers. During the U.S.-China trade war, prices rose for everyday items like electronics, apparel, and groceries. For investors in retail, consumer goods, or logistics, this means paying attention not just to headline inflation, but to shifting cost structures and margin pressures, especially when working with individual stocks rather than whole-index or ETF investing.

3. Corporate Uncertainty
Trade disputes inject uncertainty into corporate decision-making. When firms can’t predict future tariff exposure, they may delay capital expenditures, freeze hiring, or pull back on international expansion. For investors, this hesitation can translate into missed growth targets and muted earnings—particularly in sectors dependent on global logistics or just-in-time manufacturing.

1. Supply Chain Overhauls
Extended trade friction often forces companies to reevaluate where and how they produce goods. We’ve seen major shifts—like U.S. electronics firms moving assembly out of China to Vietnam, or auto parts manufacturers eyeing Mexico over East Asia. While these transitions aim to reduce tariff exposure, they’re rarely simple or cheap. Investors in logistics, infrastructure, and industrial real estate should watch these realignments closely—they signal where capital is headed next.

2. Diplomatic Strain and Policy Risk
Trade wars rarely stay confined to economic issues. They often spill into broader geopolitical tensions, weakening cooperation on unrelated global challenges—climate change, cybersecurity, defence pacts. This interconnection raises the stakes for investors in global markets: rising diplomatic strain often translates into policy volatility, regulatory surprises, or sanctions risk.

3. Shifting Global Trade Dynamics
As countries adjust trade relationships, new trade blocs may emerge, causing previous alliances to wobble and emerging markets to rocket into sudden winners. For example, while U.S. exports to China declined during the 2018–2020 trade war, Southeast Asian economies gained ground by filling the supply gap. For investors, this means looking beyond traditional powerhouses and considering growth plays in newly strategic regions.

Trade wars generate short-term chaos and long-term structural shifts. While they introduce volatility and uncertainty, they also create inflection points that can redefine industries. The key isn’t just to react—it’s to anticipate: monitor policy signals, follow supply chain movements, and identify which regions or sectors stand to gain from the fallout.

In fact, volatile periods can be an opportunity—if approached with a clear, long-term strategy.

1. Diversify Your Portfolio: Investment Portfolio Diversification remains one of the most powerful tools against geopolitical risk. That means spreading your investments across asset classes (stocks, bonds, real estate), geographies (domestic and international), and sectors (technology, healthcare, consumer staples, etc.).

2. Monitor Policy Trends and Global News: Staying informed is more than just watching the headlines. Follow high-quality stock market news sources that break down policy developments and expertly analyse how proposed tariffs or trade agreements might affect key sectors. Tools like economic calendars, analyst commentary, and investor briefings can also help you anticipate market moves.

3. Focus on Defensive and Resilient Sectors: Certain industries are more insulated from trade disruption. Healthcare, utilities, and consumer staples often remain stable because they meet essential, ongoing needs regardless of global tensions.

4. Invest in Companies with Flexible Supply Chains: Firms that have diversified suppliers or multi-regional operations are better positioned to adapt during trade disruptions. Look for companies that demonstrate agility and transparency in how they manage their production and logistics.

5. Explore International and Emerging Market Exposure: While U.S.-based investors often default to domestic equities, consider exposure to emerging markets or developed economies that may benefit from trade realignments. ETFs and mutual funds focused on global diversification can reduce reliance on any single economy.

6. Keep a Long-Term Perspective: Knee-jerk reactions to market turbulence rarely end well. Focus on your long-term goals and avoid panic selling. History shows that markets tend to recover over time, even after geopolitical shocks.

7. Use the Best Investing Tools: Navigating uncertainty isn’t a solo sport. A trusted investing tool such as InvestingPro can offer lightning-fast insights based on your personal risk tolerance, goals, and time horizon – saving you both time and money in the long run.

Trade wars can be jarring, but they also act as stress tests for the global economy—exposing weaknesses, shifting power dynamics, and creating space for innovation and adaptation.

For investors, the goal isn’t to avoid exposure to affected stocks or industries altogether, but to understand where the risks lie and how long-term trends might evolve. By keeping a close eye on trade policy developments, sectoral impact, and real-time supply chain responses, investors can position themselves not just to weather the turbulence—but to capitalize on the structural shifts that follow. In uncertain times, informed positioning is the sharpest edge.

Industries with global supply chains—such as electronics, automotive, agriculture, and industrials—are most exposed. These sectors often face rising costs, supply disruptions, or loss of export markets due to retaliatory tariffs.

Yes, some investors benefit by shifting capital to less-exposed sectors (e.g., domestic utilities or healthcare) or targeting countries and companies that gain market share as trade routes realign. Volatility also creates tactical opportunities.

Tariffs raise the cost of imported goods, which can push prices higher for consumers. This inflationary pressure affects everything from clothing and electronics to food, potentially altering central bank policy and interest rate expectations.

Yes, many emerging markets rely heavily on exports. However, on the flip side, some may benefit if global buyers shift away from tariffed regions. Southeast Asia, for instance, gained from supply chain shifts during the U.S.-China trade war.

Trade wars can heavily disrupt established supply chains, often forcing companies to relocate manufacturing or diversify suppliers. This results in higher costs and longer timelines for production adjustments.

Prolonged trade wars can reduce investment, dampen innovation, and create lasting shifts in trade relationships. Even after tariffs are lifted, lost market share or strained diplomatic ties may persist.

Investors can hedge by diversifying geographically, focusing on companies with flexible supply chains, or investing in sectors less sensitive to global trade. Some may also use currency or commodity hedging strategies.

Trade wars involve using tariffs to protect domestic industries, potentially fostering growth and national self-sufficiency and pressuring trading partners for fairer terms. However, they can also increase prices, disrupt supply chains, lower investor confidence, and potentially slow economic growth and cause job losses.

Trade wars can benefit domestic producers in protected industries, such as steel, agriculture, or textiles, who face less competition from imports. Countries outside the conflict may also gain by stepping in as alternative trade partners. Some investors and traders also benefit by capitalising on shifting market dynamics, sector rotations, or currency movements.

That said, these gains are often narrow and short-lived. For most consumers, exporters, and multinational firms, trade wars bring higher costs, uncertainty, and disrupted growth.