Case Studies: Trade Wars and Markets
Case Studies: Trade Wars and Markets
Difficulty: Intermediate Published: 2025-12-31
Trade conflicts have cost global equity markets an estimated $5-7 trillion in market capitalization during escalation phases since 2018 (IMF, 2019). Understanding historical trade war patterns—escalation sequences, sector impacts, and resolution dynamics—enables investors to position ahead of consensus and avoid reactive losses.
This article examines two major trade conflict episodes, analyzes their market impacts by sector, and extracts durable lessons for portfolio management.
Case Study 1: US-China Trade War (2018-2020)
Timeline and Escalation
The US-China trade conflict followed a predictable escalation pattern that offers a template for future trade disputes.
Phase 1: Initial Actions (January-June 2018)
| Date | Action | Market Response |
|---|---|---|
| Jan 22, 2018 | US imposes tariffs on solar panels (30%) and washing machines (20%) | S&P 500 -0.1%; solar stocks -3-5% |
| March 8, 2018 | US imposes steel (25%) and aluminum (10%) tariffs | S&P 500 -1.3%; steel stocks +5%; industrials -2% |
| March 22, 2018 | US announces $50B in tariffs on Chinese goods (25%) | S&P 500 -2.5%; tech -3.5% |
| April 4, 2018 | China retaliates with $50B tariffs on US goods | S&P 500 -2.2%; agriculture stocks -4% |
Phase 2: Escalation (July 2018-May 2019)
| Date | Action | Cumulative Tariffs |
|---|---|---|
| July 6, 2018 | US tariffs on $34B Chinese goods take effect | $50B at 25% |
| Aug 23, 2018 | Second tranche: $16B at 25% | $50B at 25% |
| Sept 24, 2018 | US tariffs on additional $200B at 10% | $250B total |
| May 10, 2019 | US raises $200B tranche from 10% to 25% | $250B at 25% |
Phase 3: Peak Tension (August-September 2019)
- August 1, 2019: US announces additional 10% tariffs on remaining $300B
- August 5, 2019: China allows yuan to break 7.0 per dollar for first time since 2008
- August 23, 2019: China announces retaliatory tariffs; US raises existing tariff rates
S&P 500 during peak tension: -6.8% in August 2019
Phase 4: De-escalation and Phase One Deal (October 2019-January 2020)
- October 11, 2019: Phase One deal announced; planned tariff escalation suspended
- January 15, 2020: Phase One deal signed
S&P 500 recovery: +8.5% from August lows to January 2020
Sector Impact Analysis
The trade war affected sectors differently based on supply chain exposure and direct tariff impacts.
| Sector | Peak Drawdown (2018-2019) | Primary Impact Channel |
|---|---|---|
| Semiconductors (SOX) | -26% (Oct-Dec 2018) | Export restrictions, supply chain uncertainty |
| Industrials (XLI) | -21% (Oct-Dec 2018) | Input cost increases, demand uncertainty |
| Technology (XLK) | -20% (Oct-Dec 2018) | China revenue exposure, supply chain |
| Materials (XLB) | -22% (Oct-Dec 2018) | Steel/aluminum tariffs, China demand |
| Consumer Discretionary (XLY) | -18% (Oct-Dec 2018) | Import cost pass-through |
| Consumer Staples (XLP) | -8% (Oct-Dec 2018) | Defensive sector, limited exposure |
| Utilities (XLU) | -5% (Oct-Dec 2018) | Domestic focus, defensive |
Individual company examples:
| Company | China Revenue % | Peak Drawdown | Impact Mechanism |
|---|---|---|---|
| Apple | ~18% | -39% (Oct 2018-Jan 2019) | Tariff exposure, China demand concerns |
| Caterpillar | ~10% | -33% (Oct-Dec 2018) | Capital goods demand, steel costs |
| Boeing | ~13% | -27% (2018-2019) | China aircraft orders, aluminum costs |
| Qualcomm | ~67% | -34% (Oct-Dec 2018) | Huawei restrictions, licensing |
Market Volatility Patterns
Trade war announcements created predictable volatility spikes:
| Event Type | Average VIX Move | Average S&P Move |
|---|---|---|
| New tariff announcement (US) | +15-25% | -1.5 to -2.5% |
| Retaliation announcement (China) | +10-20% | -1.0 to -2.0% |
| Negotiation breakdown news | +20-30% | -2.0 to -3.5% |
| Deal progress news | -10-15% | +1.0 to +2.0% |
Observation: Markets priced escalation faster than de-escalation. Sell-offs on tariff news were immediate; recoveries on deal progress took weeks.
Case Study 2: US Steel and Aluminum Tariffs (2018-2021)
Background and Implementation
On March 8, 2018, the US invoked Section 232 (national security) to impose:
- 25% tariff on steel imports
- 10% tariff on aluminum imports
Initial scope: All countries (later exemptions for Canada, Mexico, EU, others)
Escalation and Retaliation
Retaliation timeline:
| Country/Region | Retaliation Date | Target Products | Value |
|---|---|---|---|
| European Union | June 22, 2018 | Bourbon, motorcycles, orange juice | $3.2B |
| Canada | July 1, 2018 | Steel, aluminum, consumer goods | $12.8B |
| Mexico | June 5, 2018 | Steel, pork, cheese, apples | $3B |
| China | April 2, 2018 | Pork, wine, steel | $3B initial |
Sector Impacts
Winners (domestic steel producers):
| Company | 12-Month Return (March 2018-March 2019) |
|---|---|
| Nucor | +12% |
| US Steel | +15% (before broader selloff) |
| Steel Dynamics | +8% |
Losers (steel consumers):
| Sector | Impact | Mechanism |
|---|---|---|
| Auto manufacturers | -15-25% (2018) | 25-40% steel cost increases |
| Appliance makers | -10-20% | Input cost inflation |
| Construction equipment | -15-20% | Material cost increases |
| Can/packaging | -8-12% | Aluminum cost increases |
Downstream cost pass-through:
Steel prices rose 40% within 6 months of tariff implementation (from $600/ton to $840/ton for hot-rolled coil). Manufacturers faced a choice:
- Absorb costs (margin compression)
- Pass through to consumers (demand destruction)
- Shift sourcing (costly and slow)
Most chose a combination, resulting in 5-8% margin compression for heavy steel users.
Agricultural Retaliation Impact
China's retaliatory tariffs specifically targeted US agricultural exports:
| Product | Pre-Tariff China Exports | Tariff Rate | Export Decline |
|---|---|---|---|
| Soybeans | $12.3B (2017) | 25% | -75% (2018) |
| Pork | $1.1B (2017) | 25-50% | -50% (2018) |
| Sorghum | $1.0B (2017) | 25% | -80% (2018) |
Farm sector equity performance:
| ETF | 2018 Return | 2019 Return |
|---|---|---|
| MOO (Agribusiness) | -9.4% | +13.2% |
| DBA (Agriculture) | -8.1% | -4.2% |
Farm sector earnings declined 30-40% in 2018-2019 due to export losses, partially offset by $28B in federal agricultural subsidies.
Policy Escalation Patterns
Both case studies reveal consistent escalation patterns that investors can monitor:
Pattern 1: Graduated Escalation
Trade conflicts rarely begin with maximum pressure. Escalation follows a predictable sequence:
- Investigation/threat phase (markets ignore)
- Initial targeted action (markets react moderately)
- Retaliation (markets price ongoing conflict)
- Escalation rounds (volatility spikes with each round)
- Negotiation attempts (temporary relief)
- Resolution or new equilibrium
Pattern 2: Sector Rotation During Conflict
| Conflict Phase | Outperformers | Underperformers |
|---|---|---|
| Escalation | Defensives (utilities, staples), domestic focus | Multinationals, importers |
| Peak tension | Treasuries, gold, USD | EM equities, cyclicals |
| De-escalation | Cyclicals, exporters | Safe havens |
Pattern 3: Volatility Asymmetry
- Escalation creates sharp, immediate volatility spikes
- De-escalation creates gradual volatility decline
- Markets "take the stairs up, elevator down"
Impact Summary Table
| Factor | US-China Trade War | Steel/Aluminum Tariffs |
|---|---|---|
| Duration | ~24 months (Jan 2018-Jan 2020) | Ongoing (modified over time) |
| Peak S&P 500 Drawdown | -19.8% (Oct-Dec 2018) | -10.2% (contribution) |
| VIX Peak | 36.1 (Dec 2018) | 25+ (March 2018) |
| Most Affected Sector | Semiconductors (-26%) | Auto/Industrials (-20-25%) |
| Least Affected Sector | Utilities (-5%) | Utilities (-5%) |
| Currency Impact | CNY depreciated 12% | Minor |
| EM Contagion | EM equities -20% (2018) | Limited |
Lessons for Investors
Lesson 1: Trade Wars Follow Predictable Patterns
Escalation is not instantaneous. Initial actions create signposts for further escalation. Investors who recognize the pattern can position before later phases:
- Investigation announcements signal months of future risk
- First tariff action typically triggers retaliation within 60-90 days
- Escalation cycles repeat until economic pain forces negotiation
Lesson 2: Sector Exposure Matters More Than Market Direction
During the 2018 trade war, utilities returned +4% while semiconductors returned -26%. Broad market hedges (shorting S&P) were less efficient than sector rotation (overweight defensives, underweight trade-exposed).
Lesson 3: Supply Chain Analysis Identifies Non-Obvious Exposures
Companies with limited direct China revenue still suffered if their suppliers or customers had exposure. Second-order effects accounted for 30-40% of sector underperformance.
Lesson 4: Retaliation Targets Politically Sensitive Sectors
China's soybean tariffs targeted farm states. EU bourbon tariffs targeted Kentucky. Retaliation follows political logic, not economic efficiency—enabling prediction of likely targets.
Lesson 5: Resolution Creates Asymmetric Opportunity
Markets price escalation faster than de-escalation. Investors who position for resolution before formal announcements capture 60-70% of the recovery move.
Monitoring Framework
Use these indicators to track trade conflict developments:
| Indicator | What It Signals | Source |
|---|---|---|
| USTR/Commerce announcements | US trade policy direction | ustr.gov, commerce.gov |
| Chinese Ministry of Commerce | China retaliation signals | mofcom.gov.cn |
| Baltic Dry Index | Trade volume stress | Bloomberg, Reuters |
| Container shipping rates | Supply chain disruption | Freightos, Drewry |
| Agricultural futures | Retaliation impact | CME |
| Semiconductor equipment orders | Tech trade impact | SEMI |
Implementation Checklist
When monitoring trade conflicts, verify:
- Identified which sectors in your portfolio have direct tariff exposure
- Mapped second-order supply chain exposures (supplier/customer analysis)
- Set alerts for USTR, Commerce, and foreign trade ministry announcements
- Established escalation/de-escalation indicators to track
- Defined sector rotation strategy for escalation phases (defensives)
- Defined sector rotation strategy for resolution phases (cyclicals)
- Identified retaliation-sensitive positions (agricultural, politically targeted)
- Set VIX alerts for trade-related volatility spikes
- Created a decision rule for reducing exposure during escalation
- Created a decision rule for adding exposure during de-escalation signals
Trade wars create predictable—though not preventable—market stress. Investors who understand historical patterns, map their exposures accurately, and pre-define response rules outperform those who react to headlines. The durable lesson: trade conflict is a process, not an event. Position for the process.