Markets are still trying to absorb the impact of President Donald Trumpâ€™s latest escalation in his trade war with China - and Beijingâ€™s inevitable retaliation.
Angry that China failed to deliver the increased agricultural purchases which, he claims, it promised earlier this year, Trump announced a 10 percent tariff on $300 billion in Chinese consumer goods to take effect Sept. 1. In response, China announced it would cut off U.S. farm imports and allowed its currency to drift lower - to which the Trump administration responded by officially branding the country a â€ścurrency manipulatorâ€ť for the first time in a quarter-century.
Partly because of the impact of tariffs, China has fallen from No. 1 to No. 3 on the list of top U.S. trading partners, and from the Iowa soybean fields to the canyons of Wall Street, people fret about the consequences of what seems like a lasting rupture in trade relations.
No mistake about it: This situation threatens economic growth both in the United States and the world, because of the direct impact of higher prices on U.S. consumer spending, and the indirect impact of the uncertainty that the U.S.-China conflict is sowing among investors.
Itâ€™s important not to exaggerate these effects: A 10 percent tax on $300 billion worth of imports amounts to a $30 billion hit to a $21 trillion economy; there were and are plenty of other threats to growth already, including Chinaâ€™s own internal economic problems.
China quickly intervened Tuesday to stop its currency from declining too rapidly precisely because it could not afford an uncontrolled devaluation and the capital flight that might breed.
And, as we have said before, some short-run uncertainty - even short-run economic pain - might be a price worth paying to negotiate China into a more sustainable economic relationship, one that did not involve so much protectionism and intellectual property theft on Beijingâ€™s part.
Still, the risks are real, and Trumpâ€™s approach inspires no confidence that he has some strategic objective in mind, as opposed to the continuation of conflict with China for its own sake.
We donâ€™t expect the president to announce his negotiating goals in advance. He should, however, base policy on objective economics, not a general anti-China animus.
In that respect, his administrationâ€™s mostly symbolic decision to brand China a currency manipulator was anything but reassuring: The fact is that, until Mondayâ€™s brief deviation, China had been propping up its currency to avoid capital flight, which had the effect of making U.S. exports more competitive.
Also misguided is the presidentâ€™s fixation on the bilateral trade-deficit number, of which his emphasis on guaranteed soybean sales is a symptom.
What matters are fair rules of the game, not predetermined outcomes. To the extent heâ€™s asking China for the former, Trumpâ€™s position will gain legitimacy in both the United States and abroad.
Trade talks resume in early September, but there is a real prospect of a conflict that lasts through the election year. Americans, and U.S. allies abroad, would be much more likely to follow Trumpâ€™s lead if he gave some indication he knew where he was going. There is no virtue in conflict for conflictâ€™s sake.