The year-long trade war between the United States and China has now slipped into the tricky terrain where bad politics threatens to crowd out good economics. If tariffs of 25 per cent were levied on all trade between the US and China, up to 0.6 percentage point will be trimmed off the United States' gross domestic product and up to 1.5 percentage points will be lost off China's. Whether President Donald Trump and his Chinese counterpart Xi Jinping find this deterring enough to resist escalating their trade war is unclear. Mr Trump is facing re-election next year and a pitch that he is holding the line on "trade cheat" China could help rouse voters and ward off challengers. He also claims the tariffs are hurting China more than the US and confer at least two other gains: a windfall to the US Treasury and an incentive for American enterprise and jobs to return to the heartland.
Among his advisers, some believe China will give up neither its illicit pursuit of US technology nor its quest to supplant the US as the sole superpower. Across the Pacific, an influential section of nationalists in Beijing believes America's real intent in this trade war is to suppress China's rise, and that because core interests are at stake, to give in to US demands for reforms is an unacceptable surrender of dignity. If both sides give way to hardliners and make decisions believing the worst of each other, years may roll by before an accord is reached. That would be a pity as trade has delivered bounties for both: for China, prosperity through access to US capital, markets and technology; and for the US, cheap goods and hundreds of billions in profits for its firms and shareholders.