The latest round of tit-for-tat tariffs between the U.S. and China has expanded the dimensions of their trade war, and the lopsided totals of goods affected give the impression that Donald Trump has the upper hand over his counterpart Xi Jinping.

Domestic politics, however, make the U.S. president’s position a lot dicier than it looks.

The Trump administration on Sunday slapped a fourth round of punitive tariffs on a broad range of Chinese goods, including household electric appliances and clothes. This provoked China to counter with its own customs duties on farm products and other imports from the U.S., further widening a conflict that is beginning to impact the world economy.

The opening salvos had come in July 2018, when Trump imposed 25% additional tariffs on $34 billion worth of Chinese imports, including industrial machinery, out of the roughly $550 billion worth of products the U.S. buys from China every year. Washington launched a second barrage the following month, targeting another $16 billion worth of imports, and escalated its attacks that September by adding $200 billion in goods to the list.

The latest and fourth batch of U.S. tariffs increased the total by $110 billion to $360 billion.

Trump has postponed new tariffs on about $160 billion worth of Chinese goods, including cellphones, laptop computers and toys, until after the start of this year’s Christmas shopping season. If the levies are imposed on Dec. 15, the total would approach the overall value of Chinese exports to the U.S.

In contrast, China’s annual imports from the U.S. amount to around $150 billion. Since Beijing has already slapped additional tariffs on $110 billion of that, Xi has few options for striking back other than raising the existing tariffs.

Yet, after bilateral trade talks broke down in April — just when the two countries appeared to be on the verge of a deal — Beijing apparently decided to brace itself for a drawn-out battle. And despite rampant speculation that Xi was facing growing criticism within the Communist Party, the party’s secretive annual summer meeting in the seaside resort of Beidaihe offered no signs that the president was in a political bind.

As long as Xi’s power base remains solid, he has quite a bit of room to manage the spat with Trump.

The U.S. leader, on the other hand, is under growing pressure to reach a deal with China, especially from farmers in the Midwest who are bearing the brunt of his tariff war and constitute a key support base. Trump’s approval ratings in the lower 40% range mean a victory in the 2020 election is far from a sure bet, and the most important factor for voters will be the health of the economy.

Only two incumbent U.S. presidents have failed to be reelected since the end of World War II — Jimmy Carter and George H.W. Bush — and an economic downturn was a major reason in both cases.

The U.S. economy grew by an annualized rate of 2.0% in the second quarter of this year, down from 3.1% in the first quarter. Signals increasingly suggest the country’s longest postwar economic expansion — now in its 11th year — is losing steam. Exports fell 5.8% in the April-June period, another worrying sign of the economic fallout from the trade tussle.

Trump is blatantly nudging the Federal Reserve to ease its monetary policy to support the weakening economy. Any attempt at using fiscal stimulus to pump up growth, however, would likely elicit stiff resistance from the Democrat-controlled House.

If the economy starts to seriously suffer, with little leeway for major monetary expansion, Trump’s reelection chances could come down to achieving a truce in the trade war.

The protests in Hong Kong add another element of unpredictability to the trade war.   © AP

Even if it is difficult to completely end the conflict, Trump might have to seek at least a temporary respite by scrapping or cutting tariffs. Such a deal would have to be arranged by the end of this year or next spring at the latest.

Rushing to compromise would also pose risks, though, with the U.S. Congress as a whole now adopting a tough posture on China. So Trump would need to pull off a difficult balancing act, seeking a temporary cease-fire in the tariff war without appearing to be soft on Beijing.

Many political pundits are predicting that Trump will look to compromise with China before the presidential election, but his penchant for surprises should not be underestimated. Frustrated with Beijing’s stalling tactics, he might expand the battle from trade to currency and the financial markets.

In that case, Trump would head into the presidential race with his hard-line China policy intact, while pinning blame for the sputtering economy on the Fed and Beijing.

The ongoing turmoil in Hong Kong, though, could compound the U.S.-China conflict — and send shock waves through the global economy.

U.S. lawmakers, Republicans and Democrats alike, are watching the waves of pro-democracy protests in the former British colony with grave concern. If Beijing moves to crack down on the demonstrators, using force like it did in response to the Tiananmen Square protests in 1989, China could be hit with international sanctions that would squeeze its economy hard.

That would turn what was a bilateral trade dispute into an all-out cold war between the two largest economic powers, with potentially devastating consequences for the global economy.