What Is a Trade War? What Investors Need to Know

A trade war occurs when countries impose tariffs or other trade restrictions on one another, raising the cost of imported goods and disrupting international trade. These disputes often involve retaliatory actions and heightened political tensions between trading partners. Common tactics include imposing tariffs—a tax on imports designed to protect domestic industries, as well as quotas, export restrictions, and other trade barriers.

They often begin with a specific trade policy trigger, which can prompt retaliation from affected trading partners. In the United States, such actions are sometimes initiated through the executive branch, either by a U.S. president or a member of the president's cabinet. Congress can also initiate trade restrictions. Common drivers of trade wars include:

• Protectionism: Countries want to shield domestic industries from foreign competition.
• Large trade imbalances: Countries that outsource significant parts of their manufacturing can find themselves vulnerable against key trading partners, especially those with global monopolies.
• Political pressure concerns: Governments may restrict trade in goods viewed as strategically or militarily sensitive.
• National security: Governments can restrict the purchase and sale of items with the potential for military uses at their discretion.

Trade wars often center on industries that are strategically important or economically significant at a given point in time, particularly those that contribute meaningfully to economic output and global supply chains. As global economies evolve, the focus of trade tensions can shift along with changes in technology, supply chains, and consumer demand.

Historically, trade wars have involved everything from opium and tea to steel and bananas. More recently, we have seen trade wars around computer chips, AI servers, electric vehicles, and rare earth elements that are essential components in countless high-tech devices. 

Trade wars can persist for years, and in some cases decades, depending on political priorities, economic conditions, and the willingness of governments to negotiate. Even when tariffs are reduced or trade agreements are revised, some restrictions may remain in place long after initial disputes fade from headlines. Over time, companies and markets often adapt to new trade realities, which can lessen—but not eliminate—their economic impact.

Tariffs and other trade restrictions are part of the larger macroeconomic environment. As with other common macroeconomic inputs—such as interest rates, labor market strength, and retail sales—no one can predict the future. If you are investing toward a long-term goal, such as investing for retirement or saving for a child's future education, the most important inputs to creating an asset allocation strategy are your time horizon and risk tolerance. As trade tensions ebb and flow, investors may want to consider a long-term strategy that they are comfortable with across the market cycle.

Economists often describe trade wars as recurring trade conflicts shaped by the economic structures and geopolitical priorities of their time. Across different eras, governments have used trade restrictions—often in response to perceived unfair trade practices—to protect domestic producers or influence strategic outcomes. These measures have periodically affected globalization, global commerce, and the U.S. economy.

Britain and other Western powers sought greater access to China's markets, leading to a series of economic and military conflicts rooted in trade restrictions and competing trade practices. Key commodities included opium, tea, and silk, and the disputes reflected broader geopolitical tensions tied to the expansion of global trade. 

The U.S. enacted sweeping tariff increases intended to shield domestic producers during the Great Depression. It's a key example of how retaliatory tariffs and import quotas can reduce international trade flows and intensify trade conflicts among major economies.

We live in a highly globalized economy, where trade tensions are likely to remain for years to come. Investors should keep an eye on their long-term strategic goals, tuning out short-term noise and market disruptions. Over longer time periods, well-run companies tend to be able to find places where they are welcome to do business. One key is to stay invested across the market cycle.