Published on Jan 29, 2026 • Updated on Jul 8, 2026
This article was written by Adem Tumerkan
Content Editor, Dunham | 2025 ThinkAdvisor Luminary Award Winner | 2026 Wealthies Finalist — Thought Leader of the Year | Macroeconomics, markets, geopolitics & global trends
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Author's Update — July 2026: The trade war has moved through several phases since this post was first written. In February 2026, the Supreme Court ruled Trump's sweeping IEEPA-based tariffs illegal, and the administration replaced them within days with a flat 10% global tariff. By June, USTR proposed new Section 301 tariffs of up to 12.5% on 60 trading partners — including China, the EU, Mexico, and Canada — citing forced labor concerns, with a public hearing held July 7. Meanwhile, a U.S.-China truce reached in late 2025 paused some retaliatory measures, but China still taxes U.S. crude oil at 20%, LNG at 25%, and beef up to 77%. The Yale Budget Lab now puts the effective U.S. tariff rate at its highest level since the 1940s. The pattern I flagged two years ago - protectionism triggering counter-protectionism - hasn't slowed. It's compounding.
Over the last few weeks, I've written to you about one of the potentially biggest themes in the coming years.
I'm talking about escalating global trade wars - particularly involving China.
Long story short, China is trying to export its way out of an economic slowdown. But as I've argued, China is far too big to do so without flooding the world with excess goods – leading to lower prices, crushed profit margins, and unemployment.
This isn't Brazil we're talking about (a ~$2 trillion economy). But a roughly $18 trillion economy with China. For China to focus more on manufacturing exports, its scale is massive for the rest of the world to absorb.
Simply put, a trade war occurs when countries impose tariffs or other trade barriers on one another in retaliation, often spiraling into broader economic conflict that disrupts global trade, supply chains, and growth.Trade wars rarely stay contained. Once retaliation begins, they tend to compound, pulling more countries, industries, and currencies into the conflict.That's what makes them dangerous.
Since writing you: here are some developments of countries trying to raise tariffs (import taxes) and other limits on Chinese goods.
The point here is that countries around the world are trying to deflect the glut of Chinese exports.
And while these tariffs are a double-edged sword – such as helping domestic producers and employers but causing higher prices for consumers – it's worrying how it may escalate.
Meaning I doubt China won't look to place retaliatory tariffs on these countries at this rate. . .
Now, the question remains, "What if China does retaliate with tariffs?"
Well, that's the big theme here. Because as the second-largest economy in the world, any tariffs China places on imports will affect many countries.
But what worries me is the potential escalation in a trade war that could happen at a time when the global economy is fighting sticky inflation, slowing growth, and higher interest rates.
So, let's look at history to highlight how a trade war can truly escalate into a whole new beast. . .
To understand what could happen, let’s go back nearly a century.
In the 1920s, the world economy was recovering from WWI. The U.S. was an export powerhouse, much like China today. Currency devaluations spread, as countries tried to make their goods cheaper abroad—a trend known as “beggar-thy-neighbor” policies.
This led to a currency war, with each country trying to gain an edge through devaluation. The result? Rising trade imbalances and tension.
But it got worse.
But other countries might not like this. They might devalue their own currencies to compete, starting a "currency war." It can lead to a cycle of devaluations where each country tries to make its products the cheapest.
In the end, devaluations can make exports cheaper and boost a country's economy temporarily. But if every country does it, it can lead to instability.
There’s so much more on this that I would love to write about, but in short, a currency war was breaking out – aka “beggar thy neighbor” policies of devaluing currencies against one another.
Now, while a currency war helped lead to the destructive Great Depression policies, there’s a lesser-known thing that contributed to making the Depression “Great”.
And that was the escalating trade wars. . .
By 1930, demand and asset prices worldwide were collapsing, and unemployment was surging. Thus, countries were desperately trying to devalue their currencies, export their excess abroad to eke out some growth, and curb imports (to protect jobs at home).
This led to the Smoot-Hawley Act – named after Senator Reed Smoot of Utah and Congressman Willis Hawley of Oregon – which was a hefty import tax that the U.S. signed into law on June 17, 1930.
The idea was to protect U.S. businesses – especially farmers – against foreign countries trying to export their way out of the early stages of the great depression.
However, its unintended consequences were profound. . .
Within two years, some two dozen countries adopted similar "beggar-thy-neighbor" trade tariffs and duties, exacerbating an already beleaguered world economy and reducing global trade.
To highlight what the Smoot-Hawley Act triggered, both U.S. imports and exports to Europe fell8 by some two-thirds (66%) between 1929 and 1932, while overall global trade declined by similar levels during the four years that the legislation was in effect.
For example, here’s a chart9 showing 78 months of global trade flows after 1929 and 2008 began. As you can see, while post-2008 saw a sharp decline (for good reason), it recovered within three-odd years. Meanwhile, 78 months after 1929 kicked off, it was still roughly -20% below.
Thus, this “tit-for-tat” retaliation exacerbated the global economic crisis and symbolized a shift towards isolationist trade policies.
Long story short, the Smoot-Hawley Act serves as a cautionary tale about the risks of protectionism (tariffs) sparking a trade war that leaves everyone worse off
The Smoot-Hawley era teaches us that economic policy is often reactive, especially during uncertainty.
What starts as “protecting domestic jobs” can quickly spiral into something much bigger—and far more damaging.
As I’ve written before:
“Bad politics often trumps good economics.”
Let’s hope this time is different. But if not, history may offer a roadmap of what to expect.
What was the Smoot-Hawley Tariff Act?
The Smoot-Hawley Tariff Act of 1930 raised U.S. tariffs on thousands of imported goods, aiming to protect domestic industries but triggering global retaliation and worsening the Great Depression.
Why are countries imposing new tariffs in 2025?
Nations are raising import taxes to block China's export surge, protect domestic industries, and respond to rising trade imbalances — echoing past protectionist patterns.
How do trade wars impact the global economy?
Trade wars can reduce global trade volumes, increase prices, disrupt supply chains, and raise inflation — all while dampening investor confidence and economic growth.
Could the current U.S.-China tariff escalation lead to a global recession?
While not guaranteed, historical precedent suggests that prolonged tariff escalations — especially among major economies — can significantly weaken global trade and increase recession risk.
What should financial advisors be watching for?
Advisors should monitor trade policy headlines, inflation signals, and sector-specific impacts (e.g., tech, agriculture, manufacturing), while helping clients remain diversified amid potential volatility.
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