When Xi Jinping first met Donald Trump back in 2017, the Chinese leader said they had “a thousand reasons to make the China-U.S. relationship a success, and not a single reason to break it.”

Two years on, ties are at their lowest point in decades -- and they appear to be worsening by the day. Trump’s threat to raise tariffs on all Chinese goods last week shattered a truce reached with Xi just weeks earlier, unleashing tit-for-tat actions on trade and currency policy that risk accelerating a wider geopolitical fight between the world’s biggest economies.

A big part of the problem is that neither leader believes the other is serious about making a deal: China sees Trump as posturing ahead of the 2020 election, while U.S. officials think Xi is looking to wait him out for a better deal. Either way, the political space for compromise is diminishing as hardliners take center stage, prompting investors to weigh the potential economic fallout.

“We are looking at a situation now that is a bit of a perfect storm,” said Dennis Wilder, former senior director for Asia on the National Security Council who is now at Georgetown University. “Both have a great deal to lose in this high-stakes poker.”

For Trump, the bet is that a hard-line stance on China will help him win another four years in the Oval Office. His administration has proudly trumpeted what it calls the most robust response in decades to a rising China, and most Democratic candidates agree with the need to stay tough on Beijing even if they don’t agree with Trump’s tariffs.

While U.S. farmer and business groups have sounded the alarm over his latest escalation of trade tensions, the Federal Reserve’s interest-rate cut last week -- and the prospect of more to come -- may give Trump some breathing space. And the president tweeted Tuesday that he’d support a fresh round of aid to farmers hurt by tariff increases, if necessary.

The political calculations for Xi are harder to grasp, given the secretive nature of the Communist Party. But analysts say he’s under pressure from senior leaders currently meeting in the seaside town of Beidaihe to get tougher as U.S. ties deteriorate, corporate giant Huawei Technologies Co. comes under attack and protests in Hong Kong spiral out of control.

China’s move on Monday to let the currency weaken past 7 yuan to the dollar and halt agricultural purchases marked a stark escalation in its response to Trump, which had been restrained for months. His administration labeled Beijing a currency manipulator in return.

No Surrender

“It is unlikely China will buckle to any further pressure as they are convinced dealing with the current U.S. administration means give them an inch and they want a foot,” said Charles Liu, a former economic negotiator with the Chinese delegation at the United Nations and founder of Hao Capital. “There does not seem to be serious interest from the U.S. side of actually wanting to do a deal.”

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