In this article, I explain why the vast majority of economists across the political spectrum think tariffs are a horrible idea. I also provide four steps to protect your portfolio from the destructive effects of a trade war.

Get ready now, because a trade war is coming. But first, some context.

I’m always frustrated when a TV reporter who’s interviewing an advocate of tariffs doesn’t simply ask: “Define a tariff.” Chances are, the politician being interviewed would get a blank, slack-jawed look like the high school students in a famous scene from the 1986 movie Ferris Bueller’s Day Off.

To a classroom of bored, half-asleep kids, a teacher in the movie (played by real-life economist Ben Stein) says in a monotone:

“In 1930, the Republican-controlled House of Representatives, in an effort to alleviate the effects of the… Anyone? Anyone?… the Great Depression, passed the… Anyone? Anyone? The tariff bill? The Hawley-Smoot Tariff Act. Which, anyone? Raised or lowered?… raised tariffs, in an effort to collect more revenue for the federal government. Did it work? Anyone? Anyone know the effects? It did not work, and the United States sank deeper into the Great Depression.”

Tariffs: A Tax by Any Other Name

Tariffs are one of those policy tools that sound appealing to anyone who thinks economics is simple: “Make foreigners pay more, and Americans win!” If only it were that easy.

President-elect Donald Trump has (once again) turned this flawed idea into a cornerstone of his trade policy, playing to his base with promises of revitalizing American manufacturing by punishing countries such as China and Mexico.

In a speech last month, Trump called tariffs “the most beautiful word in the dictionary” and threatened tariffs of up to 2,000% to block Mexican car imports (that’s not a typo; the number he cited was 2,000%).

Even America’s long-time ally Canada (yes, our benign northern neighbor) finds itself in Trump’s tariff crosshairs. Canadian Prime Minister Justin Trudeau said on December 9 that he would retaliate if Trump follows through on threats to enact tariffs on Canada. Trudeau explained that tit-for-tat tariffs between the U.S. and Canada would make life a lot more expensive for Americans.

Characteristically, Trump responded with insults. He called Canada a “state” and gave Trudeau the title of “governor.”

From steel to avocados to lumber…

So how do tariffs really work? When a tariff is imposed on, say, Chinese steel or Mexican avocados or Canadian lumber, the foreign producer doesn’t eat the cost. The tariffs are paid by U.S.-registered firms to U.S. customs for the goods they import into the United States. Importers typically pass on the costs of tariffs to customers (i.e., manufacturers and consumers in the U.S.) by raising their prices.

A tariff is a backdoor tax hike that doesn’t discriminate; it hits the working-class voters that proponents of tariffs claim to champion as hard as anyone else.

Here’s the kicker: tariffs don’t just make imports more expensive. They also invite retaliation. Countries targeted by tariffs typically respond in kind, slapping their own taxes on American exports.

That’s what China did in response to the tariffs imposed during Trump’s first term. During that period, U.S. farmers, particularly soybean growers, found themselves with piles of unsold crops while Washington scrambled to issue subsidies to offset the damage. So much for free-market principles.

Farmers in the American heartland are a key constituency of Trump’s “red state” MAGA base. Fact is, these farmers lost billions due to the deleterious effects of tariffs during Trump’s first term (see chart).

Economists (those pesky experts that populists love to dismiss) have been warning against tariffs for decades. Here’s why:

• Tariffs distort markets by artificially raising prices and encouraging inefficiency.
• They hurt consumers who end up footing the bill for higher prices on everything from cars to canned goods.
• They provoke trade wars that disrupt global supply chains, reduce exports, and slow economic growth.

The historical precedent is clear. The aforementioned Hawley-Smoot Tariff Act of 1930 triggered a global trade war, devastated U.S. exports, deepened economic misery, and hastened the outbreak of World War II.

The Real Winners and Losers

Despite promises of an American manufacturing renaissance, the tariffs imposed during Trump’s first term didn’t revive the Rust Belt. Manufacturing job growth slowed after the tariffs kicked in, while industries reliant on imported materials, like automotive and construction, saw costs soar.

Meanwhile, multinational corporations with global supply chains had the resources to adapt, moving production to countries outside the tariff zone. Vietnam, Indonesia, and other emerging markets enjoyed a windfall as companies sought alternatives to China. Small and medium-sized businesses, lacking the resources to reconfigure supply chains, bore the brunt of the tariffs’ impact.

The enduring appeal of tariffs lies in their superficial simplicity. They’re a bumper-sticker policy. The nuance—that tariffs are regressive taxes harming the very voters who cheer for them—gets lost in the noise.

Let’s be fair. Donald Trump certainly isn’t the first politician to tout tariffs and he won’t be the last. Left-wing populists, such as U.S. Senator Bernie Sanders (I-VT), also have voiced support tariffs.

Four Protective Steps to Take Now

With tariffs looming in 2025, let’s look at four ways you can protect your money.

1. Stay Diversified

Trade wars hurt exposed sectors like agriculture and manufacturing. A diversified portfolio with exposure to less trade-sensitive industries, such as health care or utilities, is a safer bet during tariff turbulence. When trade wars erupt, export-dependent industrials tend to take a hit.

2. Watch Emerging Markets

Tariff policies often create opportunities for countries positioned to absorb trade redirection. Vietnam, South Korea, Indonesia, and India, for example, saw increased investment during the U.S.-China trade war of Trump’s first term. Exchange-traded funds (ETFs) that focus on these developing countries are a shrewd bet.

3. Follow the Real Taxpayer Burden

Inflationary pressures from tariffs mean higher costs of living. This impacts consumer-focused companies, particularly those reliant on discretionary spending. Investors should watch for signs of consumer strain in the corporate earnings reports of bellwether retailers.

4. Implement Inflation Hedges

Increase your exposure to assets that historically perform well during inflationary periods. These include commodities like gold and oil, real estate investment trusts (REITs), which benefit from rising property values and rental income, and Treasury Inflation-Protected Securities (TIPS), which adjust with inflation.

WATCH THIS VIDEO: On the Front Lines of Trump’s New Financial War

Tariffs may play well on the campaign trail, but they’re a disaster in practice. They’re a tax on consumers, a drag on economic growth, and a gift to America’s competitors.

Investors, take note: in a world where trade policy is driven by rhetoric rather than reason, your best bet is to plan for the fallout. After all, if history tells us anything, it’s that tariffs never work as advertised. But they do make great fodder for political theater…and an expensive lesson for everyone else.

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John Persinos is the editorial director of Investing Daily.

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