U.S. Trade Wars With China Are Bad Policy


By Kim Catechis, Portfolio Manager, Global Emerging Markets, Martin Currie


The U.S. and China are embroiled in an explicit trade war – and an underlying technology-driven cold war. Capital markets investors have clear views of the short-term implications, allowing for straightforward decision-making on that time frame. The longer-term impacts are less visible.

The degree to which value chains and decision-making processes are being permanently disfigured appears to be underappreciated. The inescapable conclusion is that the world is moving inexorably towards another extended period of political and economic divergence.

There are similarities to the original Cold War, but in many ways the current situation is more invasive and more dangerous for investors. 

Three distinct “camps” could emerge – U.S.-led, China-led and the “Old World Order” – with increased economic and political interdependency. Investors may not be able to maintain their current freewheeling status, as public-sector plans and then large corporate asset owners could be channeled into restricting their investment exposure away from markets in the other camps.

This will likely result in acceleration of the adoption of new technologies, but at a higher risk of permanent dislocation of trade routes and long-lasting prejudice to investment returns. Inflation and interest rates will rise, fueling inequality. State intervention will increase as populations become more vocal about their deteriorating living standards.

Historically, there has been a persistently strong relationship between trade policy, foreign policy and military doctrine, yet trade interests are usually the primary motivators. The last trade war happened in the 1980s, between the U.S. and Japan, the rising Asian economic power of the time. That was more than 30 years ago, and most investors active today did not experience it.

Three distinct “camps” could emerge – U.S.-led, China-led and the “Old World Order” – with increased economic and political interdependency. Investors may not be able to maintain their current freewheeling status, as public-sector plans and then large corporate asset owners could be channeled into restricting their investment exposure away from markets in the other camps.

This will likely result in acceleration of the adoption of new technologies, but at a higher risk of permanent dislocation of trade routes and long-lasting prejudice to investment returns. Inflation and interest rates will rise, fueling inequality. State intervention will increase as populations become more vocal about their deteriorating living standards.

Historically, there has been a persistently strong relationship between trade policy, foreign policy and military doctrine, yet trade interests are usually the primary motivators. The last trade war happened in the 1980s, between the U.S. and Japan, the rising Asian economic power of the time. That was more than 30 years ago, and most investors active today did not experience it.

Kim Catechis is a portfolio manager at Martin Currie, a subsidiary of Legg Mason. His opinions are not meant to be viewed as investment advice or a solicitation for investment.

Kim Catechis

Portfolio Manager, Martin Currie


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