Trade War 1.0: Lessons from the First Major Tariff Battle
Tariffs, Markets, and Policy: Understanding Trade War 1.0
In recent years, I’ve observed how tariffs shaped what I call Trade War 1.0 —a period of global trade tensions from 2018 to 2020. This report takes a historical view, distinct from my current Trade War 2.0 analysis of today’s developments. My aim here is to explain what happened last time—how tariffs came about, their economic effects, and their impact on countries, regions, and industries—all in plain English. This isn’t about predicting the future or taking sides; it’s a factual recap to help you understand past events and how they may be relevant to your investments.
I’ll cover the broad economic picture, outline the tariffs enacted or considered, and explore how different areas and sectors were affected. Think of this as a conversation about what we saw unfold, offering context for your portfolio without stepping into speculative territory. Let’s begin with the overview, then break it down by region and sector.
Macroeconomic Recap of Trade War 1.0
Trade War 1.0 started in 2018, driven by U.S. tariffs aimed primarily at China, with other nations drawn in over time. Global trade growth slowed to about 1% in early 2019—one of the weakest rates since 2012—due to new trade barriers and uncertainty. The IMF estimated this shaved about 0.8% off global GDP by 2020 compared to a no-trade-war scenario. In simple terms, the world economy grew a bit slower than it might have otherwise.
Tariffs, which are taxes on imports, affected multiple parties. By 2019, the U.S. had placed 25% tariffs on $370 billion of Chinese goods—about two-thirds of its imports from China—while China responded with tariffs on $110 billion of U.S. goods, nearly all its U.S. imports. Other countries, including the EU and Canada, faced U.S. tariffs on steel and aluminum and countered with their own measures. This shifted costs across global trade.
In the U.S., research showed consumers and businesses bore much of the tariff burden, with household costs rising by around $419 annually in 2018, potentially doubling if more tariffs had taken effect. Companies importing goods faced higher expenses, either absorbing them or passing them on. China saw U.S. demand for its exports drop, contributing to its GDP growth slowing to 6.1% in 2019, a 30-year low. A weaker yuan helped offset some of this by making Chinese goods cheaper abroad.
The U.S. experienced an estimated loss of 300,000 jobs and 0.3% of GDP by late 2019, particularly in manufacturing and agriculture. Equity markets felt it too, dropping $1.7 trillion at one point as investors reacted to uncertainty. A goal of reducing the U.S.-China trade deficit saw mixed results—it fell from $418 billion in 2018 to $342 billion in 2019, but rose to $355 billion by 2021, while the overall U.S. deficit grew. Imports shifted from China to countries like Vietnam and Mexico, with $35 billion less from China but $21 billion replaced elsewhere.
Inflation rose slightly in the U.S., adding to household expenses, while tariff revenue helped fund farmer support. China offered tax relief to its manufacturers. Overall, Trade War 1.0 brought slower growth, higher costs, and redirected trade patterns.
Tariffs in Action: What Took Place
Here’s a snapshot of the key tariff moves from 2018 to 2020:
U.S. on China: Starting in 2018, 25% tariffs hit $250 billion of Chinese goods (machinery, electronics, etc.), with 7.5% on $120 billion (consumer items) by late 2019 after the Phase One deal paused further increases. Most remained in place by 2020.
China on U.S.: China responded with 5%–25% tariffs on $110 billion of U.S. goods, targeting agriculture (soybeans, pork, etc.) and autos. Some eased after Phase One, but many persisted.
Steel and Aluminum: In 2018, the U.S. imposed 25% steel and 10% aluminum tariffs globally. Canada, Mexico, and the EU retaliated (e.g., EU tariffs on U.S. whiskey, motorcycles, etc.), though agreements later lifted some—Canada and Mexico in 2019, and EU quotas by 2021.
Auto Tariff Threats: The U.S. considered 25% tariffs on EU and Japanese cars in 2019 but delayed them, using the possibility as leverage.
Other Moves: U.S.-EU tariffs over Airbus/Boeing subsidies (e.g., 25% on French wine) ran from 2019 to 2021 before pausing. Threats against Mexico (immigration-related) and France (digital tax) surfaced, but didn’t materialize.
Phase One Outcome: Signed in 2020, China committed to $200 billion in U.S. purchases over two years, but reached only 57%, leaving some issues unresolved.
This was the tariff playbook of Trade War 1.0—a mix of action, reaction, and a partial pause.
Country and Region Effects
United States: The U.S. introduced tariffs to address trade imbalances and practices like IP concerns. By late 2019, this led to about 300,000 fewer jobs and a 0.3% GDP dip. Consumers saw costs rise by $400–$800 yearly, and farmers faced export losses—offset by $28 billion in government aid from 2018 to 2019. The trade deficit with China shrank briefly but later grew, while overall deficits expanded. Some sectors, like steel, gained temporarily; others, like tech, faced cost pressures.
China: China’s exports to the U.S. dropped under tariffs, slowing GDP growth to 6.1% in 2019. A weaker yuan and redirected trade to other markets softened the impact. Retaliatory tariffs hit U.S. agriculture and autos, while China boosted domestic tech and manufacturing efforts.
Europe: The EU dealt with U.S. steel tariffs and countered with measures like tariffs on U.S. bourbon. Threatened auto tariffs didn’t hit, sparing firms like BMW. Europe also gained some trade, such as pork sales to China, as U.S.-China flows shifted.
Emerging Markets: Vietnam and Mexico saw export booms as production moved there—Vietnam’s U.S. sales surged, and Mexico grew under NAFTA rules. Brazil filled China’s soybean gap after U.S. exports fell. These shifts highlighted trade adaptability.
Sector Impacts
Agriculture: U.S. farmers faced steep export declines—soybean sales to China plummeted after a 25% tariff, costing billions. Government aid of $28 billion helped, but Brazil gained long-term market share.
Manufacturing and Autos: Steel tariffs aided U.S. producers like Nucor briefly but raised costs for firms like Caterpillar. Autos saw export challenges—Tesla raised prices in China due to a 40% tariff.
Technology: Companies like Apple faced tariffs on items like AirPods, cutting margins. Chipmakers, like NVIDIA, worried about China sales drops. Some shifted to Vietnam or India.
Retail: Retailers, like Walmart, saw cost increases on Chinese goods—Hasbro moved toy production to Vietnam to adapt. Prices edged up for consumers.
Export-heavy sectors struggled, while some domestic producers saw short-term gains. Flexibility in supply chains proved key.
Historical Precedent: Trade War 1.0 and the "Trump Put"
A review of Trade War 1.0 (2018-2019) provides a useful benchmark for assessing at what level of market decline the administration might shift its stance on tariffs.
The first trade war officially began in July 2018, with five separate escalatory actions against China, including:
New tariffs
Increased tariff rates
Expanded tariff coverage
The addition of Huawei to the "Entity List"
Over a five-month period, the S&P 500 declined 10% from pre-trade war levels in response to these actions.
By early December 2018, when the S&P 500 had reached this threshold, then-President Trump and Chinese President Xi declared a trade truce during the G-20 meeting in Japan.
While this did not immediately trigger a relief rally (as stocks continued to decline into year-end), the market rebounded sharply in early 2019 following easing trade tensions.
Projected Market Response: Applying the "Trump Put" to Current Conditions
Given this historical precedent, it is reasonable to assume that a similar level of market decline (approximately 10% from the starting point of trade-related concerns) could prompt a policy reversal.
The S&P 500 stood at 6,045 on Inauguration Day, making this a useful reference point.
A 10% decline from this level suggests a potential downside target of 5,440 before a shift in trade policy becomes likely.
As of now, the S&P 500 is trading near 5,816, implying an additional 6.5% downside risk before reaching a potential inflection point.
Positioning for Trade-Induced Volatility
Should a continued policy-driven market decline materialize, investors may want to consider defensive positioning. Based on prior market behavior, the following strategies could prove effective:
Relative Outperformance of Equal-Weight Indices
The Invesco S&P 500 Equal Weight ETF (RSP) has historically demonstrated resilience in such environments.
Defensive Sector Rotation
Healthcare (XLV)
Consumer Staples (XLP)
Real Estate (XLRE)
These sectors typically outperform in risk-off environments and serve as effective hedges against trade-war-induced volatility.
Bottom Line
The 10% decline threshold established during Trade War 1.0 suggests that if the market continues its decline toward 5,440 on the S&P 500, the administration may soften its stance on aggressive trade policies. Until that point, investors should remain cautious and consider defensive allocations to mitigate potential downside risks.
Final Thoughts
Reflecting on Trade War 1.0, it’s evident tariffs brought challenges—slower growth, higher costs, and trade shifts. Most U.S.-China tariffs stayed in place post-2020, with varying regional and sectoral outcomes. While some industries adapted by shifting supply chains, others absorbed higher costs or faced long-term losses in market share. The broader lesson is that trade policy uncertainty can create volatility, influencing business investment, corporate earnings, and inflation in ways that extend beyond just the immediate tariff impact.
For investors, this underscores the value of diversification—across strategies, regions, sectors and industries—to manage such disruptions. It also highlights the importance of tracking global trade trends as shifts in policy, economic alliances, and supply chain strategies continue to shape markets. History shows that trade tensions evolve over time, rather than reaching a clear resolution, meaning their effects can persist long after the initial disputes fade from headlines. As your advisor, I’ll keep monitoring how these historical patterns inform today’s markets, ensuring your portfolio stays balanced.
And remember - The one fact pertaining to all conditions is that they will change.
Feel free to use me as a sounding board.
Best regards,
-Kurt
Schedule a call with me by clicking HERE
Kurt S. Altrichter, CRPS®
Fiduciary Advisor | President
Email: kurt@ivoryhill.com | ivoryhill.com