The Thucydides Trap: Ancient Greek lessons for modern markets

In sport, the pattern is familiar and even celebrated in that there is the inevitable rise of a hungry contender, the unease of the incumbent, and the inevitable collision. In geopolitics, the stakes are higher.

At the opening of the Trump-Xi summit in Beijing on May 14, President Xi Jinping posed a question that caught most observers off guard. Rather than leading with trade figures or the Iran war, Xi invoked a story of a conflict that ended more than two millennia ago.

“The world has come to a new crossroads,” he told President Trump. “Can China and the United States transcend the so-called ‘Thucydides Trap’ and forge a new paradigm for major-power relations?”

The phrase refers to the ancient Greek historian Thucydides, who chronicled the Peloponnesian War. The nearly three-decade conflict between Athens and Sparta that began in 431 BC. In his account, Thucydides concluded that the war was inevitable: it was the rise of Athens, and the fear this instilled in Sparta, that made conflict unavoidable.

As an aside, I’ll confess that when I first heard ‘Athens versus Sparta,’ my mind went straight to the movie ‘300’, before finding out that the movie was about Sparta against the Persians. Different war, but same problem.

Harvard political scientist Graham Allison modernized the concept, tracing 16 historical rivalries between rising and established powers and finding that 12 of them ended in war. Xi’s invocation was no accident; it was a carefully calibrated signal that Beijing now sees itself as the rising power that America must learn to accommodate.

The parallel to Athens and Sparta is instructive for investors. Athens was the dynamic, commercially innovative power. A maritime trading empire whose wealth grew through networks, alliances, and technological ingenuity. Sparta was the established military hegemon, land-based, conservative, and threatened not by any single Athenian provocation but by the structural shift in power that Athens’ growth represented. The war that followed was devastating for both: Athens lost its empire, Sparta won but was permanently weakened, and the entire Greek world was left vulnerable to Macedonian conquest within a generation.

Today’s superpower rivalry carries echoes of that dynamic. China, like Athens, has risen through commerce, manufacturing prowess, and technological ambition. The United States, like Sparta, retains overwhelming military superiority but watches its relative economic dominance erode. The summit itself illustrated the power shift. Trump arrived seeking deliverables, for example a Boeing mega-order, Chinese pressure on Iran, rare-earth supply assurances, but left with considerably less than anticipated. The 200 Boeing jets announced fell well short of the 500 Trump had floated; there was no breakthrough on Iran or the Strait of Hormuz; and the rare-earth question was deferred. Beijing’s readout, meanwhile, secured the framing it wanted: a “constructive relationship of strategic stability” between equals, what Trump himself approvingly called the “G-2.”

The summit outcome confirmed what the Council on Foreign Relations had argued beforehand: China held the stronger hand. The February 2026 Supreme Court ruling that gutted IEEPA tariffs stripped the U.S. president of his most potent unilateral trade weapon. China’s dominance in rare earths gives Beijing an economic lever with no near-term Western alternative. And the Iran conflict, which has kept Brent crude above $100/bbl since March, has made Chinese diplomatic cooperation crucial.

But the Thucydides Trap is not fundamentally about trade balances or tariff rates. It is about the structural instability that arises when a rising power and an established power cannot agree on their relative status. And nowhere is that instability more acute, or more consequential for investors, than Taiwan.

Xi’s warning to Trump was explicit. Mishandling Taiwan, he said, would place the US-China relationship in ‘great jeopardy.’ Beijing’s readout described Taiwan as the “most important and most sensitive issue” in bilateral relations. For investors, the important question is what happens to the investment landscape if a severe escalation happens.

To be clear, a full-scale Chinese invasion of Taiwan remains a low-probability event and is more likely placed in a tail risk category give the enormous costs to all sides. Yet low probability is not zero probability, and the concentration risk is extraordinary. Taiwan produces roughly 90% of the world’s most advanced semiconductors at 3-nanometer and below. TSMC alone accounts for over 65% of global contract chipmaking revenue. Were China to attempt an invasion, blockade, or even quarantine of the island (however unlikely) the disruption would be immediate and severe. Every sector that depends on advanced chips – artificial intelligence, automotive, telecommunications, defence, healthcare – could face a supply crisis measured not in weeks but in years.

In such a scenario, the ripple effects across asset classes would likely be profound. Semiconductor equities such as TSMC and its direct supply chain would face existential risk, while US-based foundries, chip-equipment makers, and domestic rare-earth producers would likely reprice higher on the thesis of forced reshoring. The CHIPS and Science Act, TSMC’s $165 billion Arizona expansion, and the January 2026 US-Taiwan trade agreement are all attempts to mitigate this concentration risk. But the reshoring effort will take a decade to meaningfully reduce dependence on Taiwan.

Thucydides understood something that modern risk models often struggle to capture, which is that power conflict is often not driven by rational calculation, but rather by fear and greed. Xi’s invocation of the Trap was a recognition that the structural forces pulling the two powers toward confrontation are powerful, and that avoiding the fate of Athens and Sparta requires conscious, sustained effort from both sides.

For investors, the lesson is to ensure that portfolios are resilient in a world where the probability of great-power confrontation, while still low, has arguably risen to its highest level since the Cold War. This means understanding your portfolio’s semiconductor exposure and maintaining meaningful allocations to real assets and gold; but also, importantly, treating geopolitical risk not as a tail risk event to be dismissed, but as a structural feature of the investment landscape for the decade ahead. DM

Author: Jason Swartz, Portfolio Manager, Old Mutual Investment Group