How Do Tariffs Affect the Stock Market?

How do Tariffs Work?

When an item is produced in one country and sold in another, it crosses a border. For example, a television manufactured in China is exported from China and imported into the US to be sold in the US.

That television competes with one manufactured in the US (or any other country, really).

If the US government wants to make American goods more favorable to purchase, it can levy an import tariff on the imported item. This could be a tax expressed as a percentage of the price (an ad valorem tax) or as a fixed price per unit (a specific tariff).

Raising the prices of all Chinese-manufactured televisions by 20% (the ad valorem tax) could have the intended effect of making American-manufactured televisions more favorite to American consumers, leading to more sales of the American-manufactured products.

China, of course, wants to export as many goods and services to the US as possible, so they see tariffs as a way of penalizing their products in the market and are likely to retaliate by imposing tariffs on American exports. This means that American goods and services imported into China will be more expensive with the tariffs in place.

What do Tariffs Mean for Consumers?

Tariffs may not apply only to finished goods. They may apply to raw materials and parts and components as well. For example, the Trump administration started its tariff plan by adding taxes on steel imports.

An American consumer may not buy steel themselves, but steel is a big part of cars, trucks, buildings, durable goods such as home appliances, and more. When the costs of raw materials go up, the costs of those finished goods and services are likely to increase too. Even if the intention is to encourage these businesses from buying American steel instead of Chinese steel, the supply of American steel is limited. Higher prices in one part of the supply chain will affect prices throughout.

This means that prices on consumers have the potential to rise. Keep an eye on inflation and the prices of goods and services to see how tariffs affect you and the economy.

The consumer impact of tariffs manifests in several ways. Prices may go up as retailers and manufacturers pass increased costs along to customers. You might have to wait longer to purchase something that becomes more expensive, delaying that new appliance or electronic device. You might decide to purchase something used instead of new to avoid tariff-inflated prices. Or you might not make that purchase at all, deciding the higher price exceeds your willingness to pay. Each of these individual decisions, multiplied across millions of consumers, affects demand throughout the economy and ultimately impacts corporate revenues and stock prices.

What do Tariffs Mean for Investors?

What does this mean for businesses? That depends what they make, who they sell to, and who they buy from.

Real Company Examples from 2025

Let's examine how tariffs affect specific companies trading today.

Tesla (TSLA) - Manufacturing Exposure. Tesla operates Gigafactory Shanghai, producing roughly half its global vehicle output in China for both Chinese customers and export markets. When the US imposed 25 percent tariffs on Chinese electric vehicles in 2024 (expanded from 10 percent under Section 301), Tesla faced a strategic dilemma. The company manufactures Model 3 vehicles in Shanghai for export to Europe and Asia, making those cars more expensive in tariff-protected markets. Additionally, retaliatory Chinese tariffs on US auto parts increased costs for components Tesla ships from American suppliers to Shanghai. Investors should monitor Tesla's supply chain diversification efforts and regional production allocation. Source: Tesla Investor Relations and USTR Section 301 tariff updates.

Apple (AAPL) - Supply Chain Complexity. Apple assembles most iPhones, iPads, and MacBooks in China through contract manufacturers like Foxconn. The company buys semiconductors from Taiwan, displays from South Korea and Japan, and designs products in California. Tariffs on Chinese-assembled electronics directly increase Apple's import costs. A 20 percent tariff on a $1,000 iPhone means Apple must either absorb $200 per unit (reducing profit margins by roughly 5 percentage points based on typical hardware margins) or pass costs to consumers (potentially reducing sales volume). Apple has gradually shifted some production to India and Vietnam, but this transition takes years and increases complexity. The stock dropped 3.4 percent in December 2024 when Trump signaled renewed technology tariffs for 2025. Source: Apple Investor Relations and SEC 10-K filings.

Caterpillar (CAT) - Raw Material Impact. Caterpillar manufactures heavy machinery including excavators, bulldozers, and mining equipment. The company uses enormous quantities of steel and aluminum, both targeted by Trump's 2018 tariffs (25 percent on steel, 10 percent on aluminum). These tariffs increased Caterpillar's material costs by an estimated $100 to $200 million annually according to the company's 2018 Form 10-K filed with the SEC, with the company stating "changes in government trade policy, including the imposition of additional tariffs, could adversely affect demand for our products and our competitive position." While Caterpillar can pass some costs to customers through price increases, construction and mining companies operate on tight margins and may delay purchases when equipment prices rise. Additionally, China imposed retaliatory tariffs on US-made heavy equipment, making Caterpillar products more expensive for Chinese buyers competing against local manufacturers like Sany and XCMG. Source: Caterpillar earnings calls and Caterpillar Investor Relations.

Walmart (WMT) - Consumer Goods. Walmart imports roughly 60 to 80 percent of its merchandise from China according to various estimates, including clothing, electronics, toys, and household goods. Tariffs on Chinese consumer goods directly increase Walmart's wholesale costs. The company faces a difficult choice: absorb tariff costs (reducing profit margins) or raise retail prices (potentially losing customers to competitors). During the 2018-2019 trade war, Walmart executives warned that tariffs would force price increases on thousands of items. In testimony before the House Ways and Means Committee on June 19, 2019, Walmart CEO Doug McMillon stated that "additional tariffs will lead to increased prices for customers" and urged negotiated solutions. The stock experienced volatility correlating with tariff announcements, dropping 3.1 percent in May 2019 during peak trade tensions. Walmart has since worked to diversify sourcing to countries like Vietnam, Bangladesh, and Mexico, but this process takes years. Source: Walmart Investor Relations.

These examples demonstrate how tariff impacts vary by company based on manufacturing location, supply chain geography, pricing power, and customer sensitivity to price increases. When analyzing any stock for tariff risk, investigate where the company manufactures products, sources materials, and sells finished goods.

If you're looking at the market as a whole, you can think of tariffs and a trade war as multiple governments interfering in the market so as to change the balance of trade between themselves. The long game may be to force the US and China to renegotiate the terms by which items are imported and exported.

Yet no one knows how that will turn out.

Tariffs Throughout History

Current tariff debates echo historical patterns. Understanding past episodes helps put today's trade tensions in context.

Smoot-Hawley Tariff Act of 1930. This represents the most infamous tariff policy in American history. The act raised tariffs on over 20,000 imported goods to the highest levels in US history, with average rates exceeding 50 percent on many items. Other countries retaliated with their own tariffs on American exports. Global trade collapsed by roughly 65 percent between 1929 and 1934. While the Great Depression had multiple causes, most economists agree Smoot-Hawley worsened the economic crisis. The Dow Jones Industrial Average, which had already fallen from its 1929 peak, continued declining through 1932, eventually losing 89 percent of its value. This episode taught policymakers that protectionism can backfire spectacularly, contributing to the post-World War II emphasis on trade liberalization. Source: National Bureau of Economic Research historical data.

Reagan Japan Auto Tariffs (1980s). Facing pressure from Detroit automakers struggling against Japanese competition, the Reagan administration negotiated Voluntary Export Restraints with Japan in 1981. These weren't technically tariffs but had similar effects by limiting Japanese car imports. Japanese automakers responded by building factories in the United States (Honda in Ohio, Toyota in Kentucky, Nissan in Tennessee), creating American jobs while maintaining market access. The US stock market performed well during this period despite trade tensions, partly because the restrictions were negotiated rather than imposed unilaterally and partly because Japanese companies invested billions in American manufacturing. This episode demonstrated that trade restrictions can sometimes lead to foreign direct investment rather than trade reduction.

Obama Tire Tariffs (2009). President Obama imposed 35 percent tariffs on Chinese tire imports in 2009, declining to 25 percent over three years. The Peterson Institute for International Economics estimated this saved approximately 1,200 American tire manufacturing jobs but cost consumers $1.1 billion in higher prices, working out to roughly $900,000 per job saved. China retaliated with tariffs on US chicken exports, hurting American poultry producers. The stock market impact was limited because the tariffs applied to a narrow product category and occurred during the broader recovery from the 2008 financial crisis. This case study illustrates how even successful protectionism (measured by jobs saved) can be economically inefficient.

Trump Steel and Aluminum Tariffs (2018-2019). The first Trump administration imposed 25 percent tariffs on steel and 10 percent on aluminum imports in March 2018, citing national security under Section 232. These tariffs increased costs for steel-consuming industries (automobiles, construction, machinery) while benefiting domestic steel producers. US Steel and Nucor stocks initially rose on the news, but broader market indices experienced volatility as investors worried about retaliation and supply chain disruption. Studies by the Federal Reserve found that tariff-induced cost increases offset any benefits to protected industries, with manufacturing employment showing no net gain. The experience reinforced that tariffs create winners and losers within the economy, complicating stock market reactions.

These historical episodes share common patterns: initial market volatility, retaliation by trading partners, costs passed to consumers, and often unintended consequences. History suggests that narrow, targeted tariffs cause less market disruption than broad protectionist policies, and that negotiated solutions typically work better than unilateral actions. For a nonpartisan overview of recent tariff actions and their economic impacts, see the Congressional Research Service.

What to Expect in a Trade War?

You could think of all of this negotiation as trying to redefine how the market works, and you'd be right.

You could also wonder if anyone could predict how things will turn out. The easy answer is "no". Yet with that said, expecting uncertainty and volatility is worthwhile.

Which Sectors Face the Highest Tariff Risk?

Not all industries experience equal tariff exposure. Understanding sector-specific vulnerabilities helps you assess portfolio risk.

Technology sector - High vulnerability. Technology companies face significant tariff risk due to concentrated manufacturing in Asia, particularly China and Taiwan. Semiconductors, smartphones, computers, and networking equipment frequently cross multiple borders during production, with design in the US, chip fabrication in Taiwan or South Korea, and assembly in China. Tariffs increase costs at each border crossing. Additionally, China has retaliated against US tech restrictions with its own measures, creating a two-sided risk. Major tech stocks like Apple, Nvidia, and Qualcomm all derive substantial revenue from China while depending on Asian supply chains. The CHIPS Act attempts to bring semiconductor manufacturing back to the US, but this transition will take years and enormous capital investment.

Related: manage volatility with liquidity and with diversify your exposure to risky sectors.

Manufacturing sector - High vulnerability. Heavy manufacturers consume massive quantities of steel, aluminum, copper, and other materials often subject to tariffs. Companies like Caterpillar, Deere, Boeing, and General Electric face both direct tariff costs (on imported materials) and indirect costs (higher domestic material prices as US suppliers raise prices to match tariffed imports). Manufacturing also experiences retaliatory tariffs when trading partners impose their own barriers on American exports. The sector shows particular sensitivity to tariff announcements, with industrial stocks frequently declining on trade war escalation news.

Consumer retail sector - Moderate vulnerability. Retailers like Walmart, Target, and Best Buy import enormous volumes of consumer goods from China and other low-cost manufacturing countries. Tariffs force retailers to choose between absorbing costs (reducing margins) or raising prices (potentially losing customers). Dollar stores face especially acute pressure because their entire business model depends on selling items at $1 or $5 price points, leaving no room to pass tariff costs to customers. However, retailers can sometimes diversify sourcing to non-tariffed countries over time, and strong brands with loyal customers may successfully raise prices without losing significant market share.

Agriculture sector - High retaliatory risk. American farmers produce far more than domestic consumers can eat, making exports critical. When the US imposes tariffs, China and other countries frequently retaliate by targeting US agricultural exports. During the 2018-2019 trade war, China imposed tariffs on US soybeans, pork, and other farm products, devastating Midwest farmers and causing agricultural equipment maker John Deere's stock to fall. According to USDA Economic Research Service data, US soybean exports to China fell from $12.3 billion in 2017 to $3.1 billion in 2018, a 75 percent decline directly attributable to retaliatory tariffs. The federal government provided $28 billion in bailout payments to farmers affected by retaliatory tariffs, effectively socializing the costs of trade policy. Agricultural stocks show high volatility during trade disputes because farms cannot easily pivot to new buyers when major export markets close.

Low-vulnerability sectors. Some industries operate mostly insulated from international trade, so they have minimal tariff risk. Healthcare providers (hospitals, insurers, pharmacy benefit managers) serve domestic markets with domestic labor. Utilities generate and distribute electricity locally. Real estate and construction primarily use local labor and domestic materials. Telecommunications companies build networks domestically (though they may use imported equipment). Banks and financial services firms largely serve domestic customers. Investors seeking tariff protection might increase allocation to these sectors, though this comes at the cost of potentially missing growth opportunities in more globally exposed industries.

Strategy tip: use margin of safety to time entries during tariff-driven dislocations.

When trade tensions rise, money often flows from high-vulnerability sectors into defensive sectors, creating rotation opportunities for active investors. Understanding these sector dynamics helps you anticipate market movements and adjust portfolio positioning accordingly.

Markets and investors like stability. Tariffs throw out that predictability, and they force you to change the way you think about the businesses you have invested in. Market volatility reflects that uncertainty. In times of volatility like this, money flows to less risky investments.

Common Mistakes When Investing During Trade Wars

Tariff-driven market volatility tempts investors into predictable errors. Recognizing these mistakes helps you avoid costly decisions.

Panic selling on tariff headlines. Markets frequently overreact to tariff announcements, dropping 2 to 5 percent in a single day on trade war escalation news (and bouncing back on hope). Investors who sell during these panic moments lock in losses and miss subsequent recoveries. Historical data shows that markets often rebound within weeks or months as investors realize the actual impact is less severe than feared or as companies adapt their supply chains. During the 2018-2019 US-China trade war, the S&P 500 experienced multiple 5 percent corrections on tariff news but still finished 2019 up 29 percent (S&P Dow Jones Indices year-end review). Patient investors who held through volatility captured those gains. Unless your investment thesis has fundamentally changed (the company cannot adapt to the new tariff environment), resist the urge to sell on headline fear.

Ignoring retaliatory effects. Many investors focus solely on US tariffs imposed on imports but overlook retaliatory tariffs that trading partners impose on US exports. When analyzing a company, consider both sides. Does the company import materials that face tariffs (cost pressure) or export products that face retaliatory tariffs (revenue pressure)? Agricultural companies, industrial manufacturers, and consumer goods producers all face two-sided tariff risk. China, the EU, Canada, and Mexico have all demonstrated willingness to retaliate against US trade measures. Comprehensive analysis considers the full bilateral trade relationship, not just one direction.

Forgetting supply chain complexity. Modern manufacturing involves global supply chains where components cross multiple borders before reaching consumers. A tariff on Chinese imports might affect a product assembled in Mexico using Chinese components. A tariff on steel affects not just steel consumers but also companies that use steel in their machines or in what they produce. Second-order and third-order effects ripple through the economy in ways that may not be obvious from a company's immediate operations. Read company 10-K filings and listen to earnings calls where management discusses supply chain exposure and tariff impacts. These primary sources provide better information than generic sector analysis.

Assuming all tariffs are equal. A 10 percent tariff on luxury goods affects markets differently than a 25 percent tariff on essential industrial raw materials. Narrow tariffs on specific products create less disruption than broad tariffs on entire categories. Negotiated arrangements (like Reagan's Japan auto export restraints) generate different outcomes than unilateral impositions. Time-limited tariffs used as negotiating tactics cause less damage than permanent protectionist barriers. Consider the scope, size, duration, and purpose of tariffs when assessing market impact rather than treating all trade measures as equivalent.

Overlooking currency effects. Tariffs and currency movements often interact in complex ways. When tariffs make imported goods more expensive, the tariff-imposing country may experience currency appreciation as demand for its exports increases relative to imports. Conversely, retaliatory tariffs might weaken a currency. For multinational companies, currency fluctuations can dwarf tariff costs. A 10 percent tariff might increase costs by $100 million, but a 15 percent currency move could change revenues by $500 million. Follow both trade policy and foreign exchange markets when analyzing tariff-exposed stocks.

Forgetting adaptation and diversification. Companies are not static targets for tariff impacts. Over months and years, businesses adapt by shifting supply chains, renegotiating contracts, raising prices, or lobbying for exemptions. Apple has moved some production to India. Manufacturers have shifted sourcing from China to Vietnam or Mexico. These adaptations reduce tariff exposure over time. Short-term tariff impacts visible in quarterly earnings may not persist at the same magnitude for years. When evaluating long-term investments, consider management's ability to adapt rather than extrapolating immediate tariff costs indefinitely.

In Trumpian theory, import tariffs promote domestic manufacturing. There's no evidence of this, as multiple analyses (for example, a Federal Reserve study finding tariff cost increases offset employment gains) show limited net manufacturing job improvement—see Federal Reserve FEDS Working Paper 2019-07. Global value chains remain highly complex (design, fabrication, assembly spread across regions), the time it takes to build domestic factories is measured in years, supply chains still rely on imported raw materials, and firms need skilled workers that are in short supply. Tariffs rarely shortcut these structural constraints.

Can you profit from this? Yes, if you are careful. A good company is a good company, and a lot of stocks become 2 to 5 percent cheaper with the drop in the stock market during tariff panics. Maybe that puts them within your margin of safety.

For the time being, expect tariffs to continue and a trade war to escalate until China and the US can negotiate a better trade agreement. Who knows how that will change the market? Until then, look carefully at the businesses you want to invest in so that you understand where their items are produced, where they get the materials to produce them, and where they're sold.

This will help you understand the risk of tariffs and trade wars, which makes you a more intelligent investor.