President Donald Trump and Chinese President Xi Jinping are caught in a growing dispute over trade and, more broadly, the significant differences between their two very different political economies. Tough as it is to predict the future, there are some signs as to who will be the winners and losers.

Trump calls the dispute “a little squabble,” and in economic terms the threat of conflict with China does seem minimal. The retaliatory tariffs China unveiled last week, for example, won’t significantly slow the American economy, cutting economic growth by about a tenth of a percentage point next year if the spat isn’t ended, according to Oxford Economics and Moody’s Analytics.

Indeed, the biggest cost may be imposed on investors, who for years have inflated the economic potential of communist China’s state-directed economy. Major public companies in the United States, including Apple, Caterpillar, and Boeing, are among some of the leading exporters to China. Yet exports to China accounted for just 7.2 percent of overall American exports in 2018. According to the U.S. Trade Representative, the top export categories that year were: aircraft ($18 billion), machinery ($14 billion), electrical machinery ($13 billion), optical and medical instruments ($9.8 billion), and vehicles ($9.4 billion).

As this writer noted in The National Interest, the basic structural political differences between the United States and China seem to make a trade conflict inevitable. China views commercial relations with other countries as an extension of the political conflict between Western democracies and itself—that is, an extension of war. Despite the rhetoric and hand wringing from the American mainstream media, the prospect of cooler trade relations with China may provide the United States with an opportunity to expand ties with other Asian nations, such as Vietnam and India.

If trade war with China becomes a permanent part of the American political landscape and the Trump tariffs remain in place, who loses? The direct losses will be borne by the importers, who will then pass those higher prices along to customers. As prices rise, end buyers will start seeking substitutes. It should be apparent that a tariff is a regressive tax and that increased taxes lower household income available for other expenditures. Whether Americans can find substitutes for Chinese goods such as shoes will determine the ultimate impact on prices and spending.

“U.S. retail sales unexpectedly fell in April as households cut back on purchases of motor vehicles and a range of other goods, pointing to a slowdown in economic growth after a temporary boost from exports and inventories in the first quarter,” Reuters reports. Is this an indication of the “drag” on growth that is caused by taxing things like imports? In classical economic terms, the answer is a resounding yes. The surge in imports that was meant to avoid earlier tariffs now seems to have subsided.

“The only form of taxation that avoids the sales reducing dynamic of tariffs is a properly adjusted progressive tax on each citizen’s ‘net’ income,” notes author and attorney Fred Feldkamp. “Each participant’s marginal propensity to consume assures the capacity for continuous economic growth that is consistent with government fiscal responsibility. The United States even amended the Constitution in 1913 because only a tax on net income allows for truly fair taxation that does not restrain growth.”

Another aspect of the trade dispute is the idea of a “nuclear option,” whereby China would sell its holdings of U.S. Treasury and agency securities to cause a “collapse” of the dollar. Economists and global pundits have spent weeks waxing effusive on the potential impact this would have on interest rates and the economy, yet few serious analysts see a Chinese move out of dollars for its official reserves as a practical possibility.

“China currently owns $1.13 trillion in Treasurys, a fraction of the total $22 trillion in U.S. debt outstanding but 17.7% of the various securities held by foreign governments, according to data from the Treasury and the Securities Industry and Financial Markets Association. Should the Chinese decide to walk away or reduce their role in the market, that, at least in theory, could create a substantial dislocation for a country such as the United States that relies so much on sovereign entities to buy its paper,” reports Jeff Cox of CNBC.

But is this right? Treasury securities are essentially a substitute for cash. If the Bank of China decided to hold its surplus funds in cash, it would be difficult to move into other currencies because of size constraints. The dollar is the world’s means of exchange because it is a very large currency that can easily accommodate significant transactions such as oil and other commodities, investments, and global debt payments.

Central banks around the world hold dollars and Treasury securities as liquid reserves, especially nations that have weak currencies or external account deficits. Moreover, were the Bank of China to sell its Treasury paper, there is a long list of central banks and governments that would be happy to purchase it from them.

“China would struggle to diversify their foreign-exchange reserves away from the U.S. bond market, with its depth and liquidity making it prized among foreign central bankers looking to stock up on haven assets that can be quickly sold if they need to stabilize their own currencies,” MarketWatch reports.

If the Bank of China were to hold its dollar surplus in cash, where would it deposit the funds to earn a return? Major global banks. And what would the major global banks do with the new dollar deposits from the Bank of China? Buy Treasury bonds and other low-risk dollar securities. Indeed, asset-hungry nations such as Japan and the EU could probably absorb China’s entire portfolio and would be glad to do so.

The truth is that China really has very few options to retaliate against the trade sanctions imposed by the Trump administration. Outside of the traditional approach of a currency devaluation, there does not seem to be any way for it to make up for lost exports to the United States. Yet a devaluation of the yuan would also bring with it the danger of a debt crisis affecting heavily indebted public and private borrowers in China.

“China needs the U.S. surplus more than the U.S. needs China’s trade and finances,” notes Spanish author and economist Daniel Lacalle. “And that is why the trade war will not happen. Because China has already lost it. China cannot win a trade war with high debt, capital controls and U.S. exports’ dependence. A massive Yuan devaluation and domino defaults would cripple the economy.”

Christopher Whalen is an investment banker and chairman of Whalen Global Advisors LLC. He is the author of three books, including Ford Men: From Inspiration to Enterprise (2017) and Inflated: How Money and Debt Built the American Dream (2010). He edits The Institutional Risk Analyst, and appears regularly on such media outlets as CNBC, Bloomberg, Fox News, and Business News Network. Follow him on Twitter @rcwhalen.