Historical Impact of Trade Wars on the U.S. Economy

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NAFTA USA Canada Mexico - North American Free Trade Agreement
NAFTA USA Canada Mexico - North American Free Trade Agreement

THUNDER BAY – Analysis – The world is witnessing the start of what could end up being a major North American and potentially global trade war.

American President Donald Trump has fired the first shots in this battle, Canadian Prime Minister Trudeau and Ontario Premier Ford have already fired back.

So what is the likely outcome?

Remembering my history teachers in school who always said, “Those who don’t learn from their history are condemned to repeat it”, lets look at this issue.

Firstly, over the past 100 years, trade wars have had significant economic consequences on the United States, often resulting in higher consumer prices, slowed economic growth, and retaliatory measures from trading partners. Some key historical examples include:

1. The Smoot-Hawley Tariff Act (1930) – Great Depression Worsened

  • The U.S. raised tariffs on over 20,000 imported goods, leading to retaliation from Canada, Europe, and other trading partners.
  • U.S. exports fell by nearly 60%, worsening the Great Depression.
  • Unemployment soared to 25%, as global trade collapsed.

2. Trade Conflicts in the 1980s – Japanese Auto & Tech Tensions

  • In response to Japan’s dominance in auto manufacturing, the U.S. imposed voluntary export restraints on Japanese cars.
  • U.S. car prices increased, hurting consumers, while Japan built manufacturing plants in the U.S. (Toyota, Honda, Nissan).
  • Tariffs on semiconductors led to shortages and price spikes in tech industries.

3. Trump’s 2018-2019 Trade War with China

  • The U.S. imposed tariffs on $350 billion worth of Chinese goods, leading to China retaliating against U.S. exports (especially soybeans, hurting U.S. farmers).
  • Consumer prices rose, particularly for electronics, clothing, and appliances.
  • U.S. manufacturing and investment slowed, contributing to a decline in GDP growth from 2.9% (2018) to 2.3% (2019).
  • The stock market saw volatility, and businesses faced supply chain disruptions.

The Likely Impact of Trump’s 2025 Tariffs on Canada, Mexico, and China

1. Rising Consumer Prices

  • A 10% tariff on Chinese imports will increase the cost of consumer goods, including electronics, household items, and clothing.
  • A 25% tariff on Canadian and Mexican exports will hit food prices (dairy, beef, maple syrup, produce) and energy costs (natural gas, electricity).
  • American companies relying on Canadian raw materials (e.g., steel, aluminum, lumber) will face higher costs, leading to price hikes on cars, appliances, and construction materials.

2. Slower Economic Growth & Higher Inflation

  • Tariffs function as a tax on consumers and businesses, leading to inflationary pressure.
  • Companies passing higher costs to consumers could reduce consumer spending, which accounts for 70% of U.S. GDP.
  • Potential economic slowdown as businesses cut investments and jobs in response to rising costs.

3. Retaliatory Tariffs from Canada, Mexico, and China

  • Canada and Mexico are the U.S.’s two largest trading partners and will likely impose tariffs on U.S. goods, affecting U.S. farmers, automakers, and manufacturers.
  • China could reduce imports of American agricultural products like soybeans, pork, and corn, harming U.S. farmers as seen in 2018.

4. Risk of Recession or Depression?

  • If tariffs escalate into a full trade war, it could lead to:
    • GDP growth slowing to near 0% or negative territory, pushing the U.S. into recession (similar to 2019-2020 trends).
    • Stock market instability, as investors react to trade uncertainty.
    • Job losses in export-driven industries (autos, agriculture, tech, and manufacturing).
  • However, a full-scale depression like the 1930s is unlikely, as the modern economy is more diversified, and monetary policy (Federal Reserve interventions) can mitigate severe downturns.

Conclusion: Higher Prices, Economic Slowdown, and Retaliation Likely

Trump’s tariffs on Canada, Mexico, and China are expected to:
Increase consumer prices (inflation risk)
Slow economic growth (lower GDP)
Trigger retaliation from trading partners
Hurt American farmers, manufacturers, and energy companies
⚠️ Recession risk if tariffs escalate into a prolonged trade war

Unless a trade deal is reached, these tariffs could lead to a repeat of the economic slowdown seen in 2019, with higher costs for businesses and consumers alike.

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James Murray
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