China will survive and grow and become an Asian powerhouse. So don’t worry corporate America and global money managers: China is not going to roll over. But that’s the problem. China is not going to roll over and give up providing certain subsidies to state-owned firms, large and small. China is not going to make its new intellectual property laws retroactive so American companies can litigate day in and day out for past harms.

Why does Treasury Secretary Steve Mnuchin want guarantees from China that it wont purposefully weaken the yuan? Because tariffs are going up next month, and Mnuchin doesn’t want them to be negated by China widening its forex trading ban and bringing the yuan to 7 and change against the dollar. Or weaker.

On the China trade war, resistance is futile.

If there is one big-picture campaign item that President Trump might actually succeed at fully it is passing on the China tariffs to the next government. Only a laissez-faire, free-market Democrat would take them down should Trump not get reelected in 2020.

The bottom line is that the trade dispute—as China likes to call it—is evolving into a bipartisan platform that involves key Democratic Party members like Chuck Schumer and Nancy Pelosi. Wall Street will have to get used to a low-intensity trade war and pick their winners and losers accordingly. This will all go down in the second and third quarter as Trump is expected to extend the 90-day trade truce out another 60 days. There is a chance that tariffs will remain in place and not rise until after extension, barring some sort of “Come to Jesus” moment in the Trump administration.

Round “Umpteen” Is A Winner!

The market believes that a trade truce extension is likely to keep tariffs on $200 billion worth of goods steady at 10% instead of doubling.

China’s Vice Premier Liu He leads a delegation that kicks off the eighth round of trade talks in Washington on Thursday.

“We believe the China–U.S. trade talks, covering nine areas, are indeed likely to make progress, convincing Trump it is worth extending the tariff truce if necessary,” says X. D. Chen, chief China economist for BNP Paribas. “Closing the gap should be up to President Trump,” he says. “China might have revealed its bottom line.” Chen thinks some sort of deal is likely in March, which is now consensus on Wall Street.

There are nine different target areas that are unlikely to be agreed upon this week.

These include China promising to buy more U.S. goods. Both countries are aiming to cut 20% of existing trade imbalance every year for the next five years until the trade imbalance is less than 20% of its level in 2018.

This could be pie-in-the-sky. The U.S. is a larger economy and spends more than China. If China decides to buy more widgets from the U.S. instead of other partner nations, this could bring up disputes by disgruntled third parties in the World Trade Organization, claiming they are giving each other favored nation status.

Moreover, China is relying less on its state-controlled enterprises. Its GDP is mostly thanks to the private sector. Beijing would have to demand they buy American.

The U.S. wants China to do away with tech transfers in joint venture deals. China says they don’t force anyone to give up their technology to have a JV with a mainland company, but the key word here is “force.” No one is “forced” to do it any more than one is forced to pay interest on their credit card. It is an understandable part of the transaction and of the relationship, usually, between a foreigner and a domestic company. You share know-how with the Chinese.

The U.S. is unlikely to be fully satisfied with China’s IP laws, but China has improved them, according to the majority of survey respondents in an American Chamber of Commerce poll conducted last year. The U.S. will have to live with them.

Gutting subsidies to state-owned enterprises is hard. Many of these firms are provincially owned and operated. Xi Jinping has been cracking down on them in terms of hurting their main sources of funding in the shadow banking system. But Xi is unlikely to force state firms not to subsidize production, especially if the end result in the removal of those subsidies is unemployment.

If the U.S. demands this, China cannot deliver. If China wants to keep that system in place, as part of its economic DNA, as Chen from BNP Paribas describes it, then they will have to live with 25% tariffs.

Internet-related companies and filmed entertainment might also be a market Washington will want Beijing to open further. Beijing has already opened the financial services market, a super-sexy market for U.S. investment banks who do not have to partner with local firms to set up shop as broker-dealers and wealth managers, among other things.

Tomorrow’s talks are likely to focus on how to implement any trade agreement and write those details into a legal document.

Trump said he has no plans to meet Xi during his trip to Hanoi, Vietnam, for his second summit with North Korean President Kim Jong Un next week.

Even if the trade talks fulfill the market’s wishes this week, details won’t be fully known until Trump and Xi meet at some point in March.

Even Chen from BNP, who thinks the trade war is running on fumes, thinks a 60-day extension is not necessarily good news for the market.

“We don’t think Trump could gain any more from China during an extended truce, and China might take the advantage of any changes in the U.S. or in the world to bargain back,” he says.“That could risk any deal blowing up—and the world continues to suffer uncertainty.”

If Washington insists on state company reforms, leading to oversupply in world markets, they might be disappointed. Whether that’s a deal-breaker remains to be seen. If it is, 25% tariffs are a sure thing sooner rather than later.