By Eamon Barrett
May 11, 2019

Good morning.

Last week, it seemed like a trade deal between China and the U.S. was close to completion. Just two tweets later, months of negotiations were brought to naught.

President Donald Trump tweeted on Sunday that tariffs on $200 billion worth of Chinese imports would leap from 10% to 25% if a deal wasn’t negotiated by Friday. Markets freaked, with the S&P 500 experiencing the worst week of the year. When Thursday passed with no deal reached, the tariffs kicked in at midnight and China promised retaliation with “necessary countermeasures.”

The president said his decision to hike tariffs was punishment for Beijing backtracking on agreements both sides had made during negotiations. According to Reuters, China made retractions to all seven chapters of the 150-page draft agreement, rolling back promises to change Chinese law to satisfy U.S. concerns regarding theft of intellectual property, currency manipulation, and forced tech transfers.

If I was writing a newsletter on the subject, I’d say Trump was 100% right to rebuff China’s bid to scratch out its earlier commitments. However, the president showed he still doesn’t understand how tariffs—his weapon of choice—work.

Trump insists the duties will force China to pay billions in taxes, but it’s U.S. importers and, ultimately, consumers who will be saddled with the cost. The Trump administration is readying tariffs to hit the remaining $325 billion of Chinese imports as yet untouched by the trade war too.

Of course, higher consumer costs will diminish U.S. spending and eventually impact Chinese exports, but it’s a roundabout way to do it. China state-owned People’s Daily asserts the economy is resilient enough to endure a limping U.S., but economists aren’t so sure. China is targeting 6.5% growth this year; the trade war could knock the rate down to nearly 5%.

Trump thinks China wants to hold out until the next U.S. election, when they might get to deal with “Biden or one of the very weak Democrats, and thereby continue to rip off the United States.” That may be. If there’s one thing to know about China’s state planners it’s that they play a long game, which is why many of the U.S. demands that require China to fundamentally alter its economic model are not going to stick.

The People’s Daily said this morning that a key sticking point is the “balance” of the trade deal, which China currently feels is weighted in favor of the U.S. As talks continue that imbalance will prove hard to redress. President Xi Jinping needs an outcome he can present as a “win-win” while President Trump is just looking for a solid “win.”

Now, enjoy the weekend!

Eamon Barrett
@eamonbarrett49
eamon.barrett@fortune.com

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