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The trade war's impact on the financial market: Observations from the historical global trade war - the Smoot Hawley Tariff Act

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  • Ang, James
  • Wang, Jingfang

Abstract

This study examines financial market reactions to political events that led to the passage and repeal of the Smoot–Hawley Tariff Act (SHTA) from the perspective of political uncertainty. The events were a series of debates and votes held by the U.S. House and Senate before the SHTA was signed into law in 1930 and repealed in 1934. These events increase political uncertainty about trade policy, thereby creating a unique setting to measure the impact of political uncertainty on financial market reactions. We find that each event resulted in an average loss of 3.6% in the U.S. aggregate stock market over a [−1, +1] three-day window. Such negative returns were observed at the firm level. Moreover, we find that firms with higher tariff protection performed significantly better than firms with lower tariff protection on nonevent dates. Furthermore, we discovered that trading volumes were significantly higher on event dates than on nonevent dates. Stock return volatility was significantly higher during the entire debating and voting period than during the 12 months preceding its inception and 6 months following the SHTA's passage into law. However, higher tariff protection was associated with lower return volatility outside the event window. Our findings show that political uncertainty events commanded the risk premium.

Suggested Citation

  • Ang, James & Wang, Jingfang, 2023. "The trade war's impact on the financial market: Observations from the historical global trade war - the Smoot Hawley Tariff Act," Global Finance Journal, Elsevier, vol. 55(C).
  • Handle: RePEc:eee:glofin:v:55:y:2023:i:c:s1044028322001041
    DOI: 10.1016/j.gfj.2022.100802
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    References listed on IDEAS

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    More about this item

    Keywords

    Smoot Hawley Tariff Act; Trade war; Tariff increase; Political uncertainty; Government policy; Asset pricing;
    All these keywords.

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • N72 - Economic History - - Economic History: Transport, International and Domestic Trade, Energy, and Other Services - - - U.S.; Canada: 1913-
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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