Who’s feeling the heat? Photo: Bloomberg/Bloomberg via Getty Images

Back in May, I wrote that Trump’s China tariffs will only “work” if Americans pay them. The president wants to shrink our trade deficit with China; tariffs further that end by making it more expensive for Americans and American firms to buy Chinese goods; if China takes steps that absorb the cost of the tariffs, then Americans will be spared part or all of the tariff burden, but they’ll also have less incentive to buy American.

Sure enough, after President Trump announced that another round of China tariffs would start September 1, the Chinese responded by allowing China’s currency to weaken. A weaker yuan reduces the cost of Chinese exports, helping to offset the cost of the tariffs for American consumers. That, in turn, makes American-made products relatively more expensive and hurts U.S.-based manufacturers — the opposite of Trump’s professed goal in all this.

Linette Lopez of Business Insider predicted this outcome on my KCRW podcast Left, Right & Center last Friday, saying, “This is a perfect excuse for Xi and the People’s Bank of China to lower rates, to maybe let the Yuan depreciate a little bit and blame it on Donald Trump instead of their domestic situation.” China has its own domestic economic problems that could be helped by an export-boosting currency devaluation, but a weaker currency also reduces Chinese consumers’ purchasing power and living standards. With the trade war, Trump has given Chinese president Xi Jinping a “look what you made me do” opening to weaken the currency while blaming America for pushing him to do so.

Trump would like the Federal Reserve to respond in kind, starting a competitive dollar devaluation. The Fed is very unlikely to take a step as inflationary as that; while chairman Jerome Powell made clear last week that greater global trade tensions will tend to mean more rate cuts at the margin, the Fed is pretty cautious about this sort of thing. The sharp decline in stock prices that has followed the tariff announcement, and Chinese responses to it, make it clear that market participants do not expect enough rate cutting to make investors whole from the economic costs of the trade war.

Trump expects to win the trade war because he thinks that it does more economic damage to China than to the U.S., which means China will eventually have to cave to his demands. He’s right about the first part, but not the second. While the Chinese government cares about living standards and is responsive to public opinion, it’s not a democracy. Politically, the Chinese have more room to withstand economic damage than Trump does, especially when they can appeal to nationalistic sentiment and (not implausibly) blame outside American action for their troubles.

All of which is to say, this could go on for a long time and cause a lot of damage to the global economy along the way. The sharp drop in oil prices should be especially ominous for the president — that’s the market saying that what he and Xi are doing is expected to cause real harm to global demand and output (that’s why oil’s getting cheaper: fewer people are expected to want to buy it). Investors do not believe the Fed can or will fix all of this.

Matt Yglesias made a good point over the weekend: While there still isn’t good reason to say a U.S. economic recession in the near term is likely, people aren’t focusing enough on the very likely outcome that economic growth will slow significantly while remaining positive. That already appears to be happening due to the fading of temporary effects from the 2017 tax cut. And as the trade war intensifies, it will go from a phenomenon with a small, negative effect on the growth rate to a moderately negative one. Trump still probably won’t blunder his way into a recession, but I think it’s reasonably likely he will blunder his way into, say, one percent GDP growth in 2020.

From a political perspective, the significance of the growth rate is not binary, with anything above zero being fine and anything below it being a disaster. A slower growth rate means less upward pressure on wages, less consumer spending, and less positive public sentiment about the economy. The strong economy is the main thing this unpopular president has going for him as he seeks reelection. He’s endangering that, and himself, with the trade war.