The seeds for today’s trade war between China and the United States were sown years before the 2016 election, but they weren’t nearly as visible back then. Still, some serious students of economic history see the foundering trade talks as evidence of a larger, more threatening problem.
Loomis Sayles vice chairman Dan Fuss fears that economic issues are just one manifestation of what is metastasizing into a clash of civilizations. He views the problem as modern history’s Thucydides trap, the inevitable clash between a rising power like China and an established power like America. Most of the media coverage is focused on rising tariffs and other trade sanctions.
But Fuss, who once managed Yale University's endowment and was named 2019 Outstanding Portfolio Manager last month by Morningstar, believes that trade is simply one component of the confrontation. “It is much more serious than trade,” he argues.
Before Xi Jinping, China’s leaders desired to become the world’s largest economy and dominant power, but they also “wanted to be everybody’s buddy,” as Fuss puts it in folksy terms. Xi Jinping, on the other hand, seems almost solely focused on power and domination.
Geopolitical tensions haven’t received much attention in the press, but in recent months China has stepped up its rhetoric about reunification with Taiwan. Official Chinese media even cited former American president Abraham Lincoln in its reasoning to unite the two nations.
Usually an optimist, Fuss is gloomy. “All of this has costs; none of it has benefits,” he says. “It is probably going to get worse.”
Regarding the trade battle,it will hurt American and Chinese consumers, who will be forced to pay higher prices, says Fuss, who was also named Morningstar's Fixed Income Manager Of The Year in 2009. If costs go up, inflation will eventually follow, he continues, though some of the deleterious effects of the trade war will slow growth, and thus act as a deflationary counterweight.
The longer tariffs stay in place or head higher, the more likely it is that “everyone’s unit costs of goods will be higher,” and wind their way through the global supply chain. The upshot is that markets will ultimately shrink, Fuss says.
President Trump’s calculation that the Chinese will suffer more economic pain than Americans may or may not prove correct. There is also the question of which nation’s citizens have a higher pain threshold.
“The reality is both sides get hurt,” he maintains. So far in America, it’s the agricultural and industrial sectors that are feeling the brunt of the damages.