It’s impossible to forecast where the U.S.-China trade confrontation is going, although given what the bond market is doing, it’s no place good.

The markets are trading on headlines that may become economic events, but the worst-case scenario of much higher tariffs and a much bigger slowdown in global trade has not developed yet. In other words, I don’t think we are yet at the point of no return in this trade negotiation.

I have long held the view that, because of deflationary trends in Europe and Japan, the 10-year U.S. Treasury will fall to less than 1%. The present deterioration in relations with China is adding to those deflationary trends, so a longer cycle of acrimonious recrimination actually has a deflationary impact because of the slowdown in flow of goods and services, and not inflationary because of higher tariffs, as some investors think (see chart).

Read: Trade war is raising the risk of U.S. recession, Goldman Sachs warns

Low interest rates give a boost to companies with good balance sheets, strong cash flows and high dividend yields that have more limited exposure to the trade confrontation. I can’t be more specific for the purposes of this piece — although I will try to have more picks in future missives — as in my situation I have some hard restrictions on “buy this” or “sell that,” so what I say is insight for people to make their own decisions; I am sort of over-intellectualizing it out of necessity and compliance. That said, the U.S. semiconductor sector does see some serious headwinds in further escalation of the trade war.

How trade wars act like mini-hot wars

Fiat money has no value other than the economic activity that supports it. A hot war, if extensive, can lead to a collapse of economic activity for a protracted period. If that happens, the money in circulation becomes worthless and there is no economic activity to support its convertibility into goods and services. That painful cause and effect has given gold enthusiasts a lot of inspiration for the past 5,000 years, which is why the price of gold has become a moonshot of late and will probably go higher as it’s not longer U.S. monetary policy driving it as much as it is the trade situation further deteriorating.

Fiat money can work without hot wars and trade wars, but there is much to be desired on those fronts for many developed and emerging market currencies in the world today — like the Syrian pound, for instance (see chart). The Syrian pound has basically lost 90% of its value, due mostly to the hot war there. Unless there is a hard peg, with external financial support to maintain it, like there is in Syria, the weaker currency and accelerating inflation rate spiral would bring about a Zimbabwe- or Venezuela-style hyperinflation.

Trade wars have often become hot wars. The Chinese cite the Opium Wars in defense of the present trade skirmish, in reference to when the British muscled themselves into China and Hong Kong. Citing the Opium Wars is a little ironic, as the Chinese are more at fault now, not the Trump administration.

The present situation with China can still be reversed, but the developments over the past three months indicate it has deteriorated much further. For example, It would appear that the Sun Tzu disciples from Beijing are using Trump’s own temperament against him and turning this into an election issue designed to hurt his reelection prospects. Stopping to buy agricultural goods entirely is very different than a tariff on U.S. agricultural products. That move targets MAGA farmers, many of whom voted for Trump in the last election.

I had a sneaking suspicion that the Sun Tzu disciples from Beijing wanted the trade negotiation to fail in order to devalue the yuan as they backtracked in a calculated manner in early May. Now we are getting more evidence on that front with the People’s Bank of China letting the Chinese yuan move past 7 to the dollar. More yuan per dollar means a weaker yuan, so when exchange rates are quoted that way, a rising yuan chart means a weaker yuan (see chart). Foreign-exchange reserves are now falling again and I suspect such capital outflow in China would accelerate should the cycle of acrimonious recrimination intensify. (For more, see “China has a silver bullet in its trade-war arsenal.”)

Trade wars act like mini-hot wars as trade frictions throttle economic activity like a knob on a water faucet. The higher the tariffs, the less the flow of trade and economic activity. Global trade is shrinking because of the Trump tariffs, but the good news is it has not nosedived yet, as in 2008 or, worse, as in the 1930s (see chart).

Smoot-Hawley was a big factor in the Great Depression

The most egregious trade war in the 20th century was the one caused by the Smoot-Hawley Tariff Act of 1930, when tariffs went up to 60% (see chart). While there have been some tariff hikes in the recent trade skirmish between the U.S. and China, I think we’re not at the point of no return. Still, one does have to wonder about the full name of the Smoot Hawley Tariff Act, as it reads like a Trump campaign slogan, namely: “An Act to provide revenue, to regulate commerce with foreign countries, to encourage the industries of the United States, to protect American labor, and for other purposes.”

I don’t think the U.S. president wants to collapse global trade, but I do think he wants to end the predatory practices of the Chinese government, which are to purposefully buy from their friends and neighbors to increase their political influence. If the Chinese have been getting away with this clever trade maneuver for 20 years, I understand how they would want to keep getting away with it, but Trump is the new sheriff in town, and he is not respecting old arrangements.

What most investors miss is that under the Chinese brand of state capitalism, there is a lot of government intervention in its economy. Because of the strong role of government control, there is an army of state buyers that are told where to source the necessary goods and services. It’s as simple as that. There is no such army of state buyers in the United States, or any other large economy in the world.

If the Chinese wanted to dramatically reduce their trade surplus with the U.S., which should be over $400 billion in 2019, all they have to do is direct those state buyers toward America. That would cause a big political problem of not buying from where they were buying before — which is why such a change should happen over three to five years and not relatively soon, as requested by the Trump administration.

We are probably not past the point of no return yet — as evidenced by looking at the performance of the Dow Jones Industrial Average DJIA, +1.33% — but if we were past the point of no return in trade escalation, I don’t believe that any number of Federal Reserve interest-rate cuts would stave off a global recession and a slumping Dow.

A lot is riding on this trade negotiation and brinkmanship between Trump and his Chinese counterpart. Personally, I would welcome a mutually acceptable trade deal as fast as possible. But because I am not sure that the Chinese have negotiated in good faith so far in this process, I am worried that we may open a Pandora’s box with no clear way of resolving the obvious issues.

In other words, when the cat is out of the bag, it’s very hard to put that scratching beast back in.

Ivan Martchev is an investment strategist with institutional money manager Navellier and Associates.