US President Donald Trump (L) and China's President Xi Jinping shake hands at a press conference following their meeting outside the Great Hall of the People in Beijing. Artyom Ivanov | TASS | Getty Images

Financial markets should abandon any remaining illusion that U.S.-China trade talks are a time-constrained, tradable event that ultimately will result in a deal reassuring investors. Near dead is the notion that both sides would inevitably compromise because they so badly need agreement for their own political and economic purposes. What markets have misunderstood since the negotiations resumed last December – but U.S. and Chinese officials have grasped – is that the talks had become just one of many events of a new era of geopolitical and systemic competition that will define our times. To earn their pay, market analysts will have to get a lot better at pricing in geopolitical risk. Trump's decision to more than double tariffs on $200 billion in Chinese goods, from 10% to 25%, received the most global attention this week. His move, which was fueled by the argument that China was backing out of already-negotiated terms of a draft agreement, has the potential to be the most significant of the many trade moves of his administration. Escalated tensions of other sorts went less noticed. On Monday, two U.S. warships sailed within 12 nautical miles of disputed islands in the South China Sea, the third time this year Washington has challenged China's maritime claims. At a 5G security conference in Prague a few days earlier, the U.S. and its allies drilled down on the dangers posed by the Chinese telecom giant Huawei – even as its CFO remains in Canadian custody. Make no mistake. Even if the U.S. and China seek out a trade agreement in coming weeks, it would do very little to change the relationship, which has been fundamentally altered over the past months, from one of strategic engagement to one of sharper competition. Expect economic, political and even military risks to rise until skilled strategists and diplomats from both sides establish principles and rules of the road to govern the world's most decisive bilateral relationship.

More than just trade

It's worth rewinding this Sino-U.S. movie by about a week to understand how trade talks have been increasingly less about trade. The details behind the scenes underscore how history, nationalism, systemic differences, and increasing mistrust and miscalculation, have become a combustible mix. Last weekend, it's a safe bet that Trump didn't know about the historic Chinese anniversary that made his tweeted trade bombshell even more inflammatory. His decision to turn the tariff screws tighter coincided with the 100th anniversary of Chinese student protests that then became the legendary May Fourth Movement. The upheaval was a nationalist and anti-imperialist response to what the students at the time considered their government's criminally weak handling of terms posed upon them in the post-World War I Treaty of Versailles. It's been reliably reported that Chinese President Xi Jinping personally intervened last weekend to pull back his negotiators. Beijing appears to have changed several provisions in the draft deal, but what seems to have been most unacceptable to Xi was U.S. insistence that he agree to specific language about how China would change it national laws to abide by the deal's terms. In each of the seven chapters of the draft, Reuters reported, China had deleted commitments to change laws to resolve U.S. complaints: theft of U.S. intellectual property and trade secrets, forced technology transfers, competition policy, access to financial services and currency manipulation. May Fourth Movement activists, of whom many became Communist Party leaders, would have been rolling in their graves if negotiators had given that kind of ground to American rivals on their centennial. For a leader like Xi – who has staked his legitimacy on ending what his supporters see as China's "century of humiliation" at the hand of foreign powers – the on-again and off-again trade talks had become about so much more than trade.

Mixed signals