China’s Xi to Trump: Help us save face

China has upped the ante in its trade dispute with America. By allowing the yuan to fall on foreign-exchange markets, Beijing has shown how far it will go in response to existing US tariffs on Chinese goods, as well as additional ones now threatened by President Trump.

But China’s moves also signal weakness: Beijing can no longer play the tit-for-tat tariff game. And because the devaluation has raised the risk of capital flight from China, the currency move also hints at desperation.

With or without the devaluation, Beijing is in a tough spot. On one side, the Communist Party can ill afford a trade war, since it has an implicit contract with the Chinese people to deliver prosperity in exchange for autocratic rule. But Beijing cannot countenance Washington’s demands that China import more from the United States, cease cyber theft and let Americans do business in China without Chinese partners.

These aren’t new demands, but the Trump White House wants them guaranteed in Chinese law. This last point, China’s leadership claims, is an affront to the country’s sovereignty — already a sensitive issue, given the turmoil in Hong Kong.

China has always held the weak economic hand in this dispute. Its export-dependent economy needs overseas sales, which comprise one-fifth of its gross domestic product. More than a quarter of those exports go to the United States, meaning 5% of China’s economy is exposed in this trade dispute. By contrast, the United States counts on exports for about 12% of its GDP, and barely 8% of its total exports go to China, leaving just 1% of the US economy exposed.

Moreover, some 30% of US goods sold in China are off limits to tariffs, as they constitute components, mostly to computer and iPhone assemblies, that support Chinese exports.

These relative disadvantages showed themselves early in the dispute. American firms began moving their operations elsewhere, while many Chinese firms have decamped to other Asian countries, in large part to avoid the American levies. Even the perennially upbeat (and suspect) official Chinese government statistics show that the economy is suffering — China’s GDP during the second quarter grew in real terms at its slowest rate since 1992.

Export volumes appear to have dropped more than 4% in the past year. Imports have also declined by more than 5%, indicating a drop in employment and consumer spending. While official figures still suggest a robust Chinese jobs market, surveys of Chinese media show a marked drop in...

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