Recent U.S. trade actions are aggressively using tariffs against key partners like Canada, Mexico, and China—echoing the approach taken with the 1930 Smoot-Hawley Tariff Act. 

That historic tariff, intended to protect domestic industries, instead triggered retaliatory measures that destabilized major allies, notably crippling Canadian exports and spurring economic turmoil. 

Today, similar tactics risk raising import costs and fueling inflation, potentially undermining economic recovery if the trade tensions escalate further.

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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.

The Smoot-Hawley 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.

By 1932, U.S. exports to Canada had plunged by more than 60%, sending its economy 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 for decades.

Smoot-Hawley didn’t collapse the U.S. economy. But it created long-term instability for key allies.

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, leading to another potential wave of inflation.

The last time the U.S. imposed major tariffs on China in 2018, it cost American businesses and consumers an estimated $80 billion per year. 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 watch 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.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research