For the past 15 years, U.S. trade policy has been on a steady course toward protectionism. The call for protection from foreign competition is predicated on the belief that trade restrictions will either increase equity values of firms dealing in traded goods or increase employment levels in industries competing with “cheap” foreign labor.

Investment managers should know the magnitude of movements in equity values associated with the imposition of trade restrictions. Empirical results suggest that across-the-board protectionist policies are associated with a decline in the S&P 500 and a decline in aggregate employment. In addition, examination of four industries that received specific trade protection shows that, in all four cases, imposition of the protectionist measure was associated with a decline in each industry’s stock index. One industry enjoyed a gain in employment.

Policy intervention in international trade appears to be systematically related to economic events. The most important determinant of across-the-board protectionist policies since 1960 has been a deteriorating trade balance. A decline in stock returns or in employment rate relative to the aggregate U.S. experience increases significantly the probability of imposition of industry-specific trade restrictions.