Today’s stock market crash announces a new and dire phase in the US-China trade war. Beijing has signaled that it is prepared to endure a long and debilitating trade war with the United States, after President Donald Trump announced an additional 10% tariff on $300 billion of Chinese imports following meetings in Shanghai between his top trade officials and their Chinese counterparts.

A reported directive to Chinese companies to refrain from buying US farm products seems an in-your-face challenge to the US president. And China’s decision to let the RMB depreciate past the 7.00 mark rebukes Trump’s insistence that China boosted exports by manipulating its currency.

Still, Trump came out firing on Twitter. “China dropped the price of their currency to an almost historic low. It’s called ‘currency manipulation,’” he tweeted.

Yet China clearly believes that it can boost domestic demand to compensate for reduced exports to the United States, through a combination of monetary ease, tax cuts and public spending. Today’s drop in the RMB to 7.04 to the dollar represented an ease in monetary policy.

By allowing the RMB to absorb the strains of the latest trade war round, the People’s Bank of China protected the local market.

The chart compares the implied volatility of options on the USD-RMB exchange rate to the volatility of the PBOC’s benchmark 7-day repo rate. During the bad old regime of 2015, the PBOC kept the RMB stable against the dollar, as the cost of tightening monetary policy.

Exchange rate volatility remained artificially low, but domestic money market volatility remained elevated, with high economic costs. In August 2015 the PBOC removed the RMB’s de facto peg to the dollar, sparking uncertainty across markets. Both the RMB exchange rate and the 7-day repo benchmark showed extreme volatility.

As the PBOC moved up the learning curve and markets lost their terror of RMB fluctuation, domestic money market volatility disappeared. Exchange rate volatility spiked on Monday in response to the new Trump tariffs, but barely a flutter passed through domestic money markets.

The PBOC has undertaken a textbook maneuver under stress. It is doing what the other major central banks of the world do, that is, manage its affairs according to domestic needs, as opposed to the preferences of trading partners.

That leaves Trump with few good alternatives. He has already fired his reserve ammunition, or rather threatened to fire it on September 1 when the new round of tariffs will take effect. He could conceivably impose even harsher tariffs on China, but at a gruesome cost. US consumers already will pay more for consumer electrics before the holiday season, and a punitive tariff would hit consumers right as the next presidential campaign begins.

Trump could direct the Treasury to intervene on foreign exchange markets to push down the value of the dollar, which would require the government to buy Chinese currency and sell US dollars. That would be unseemly, as well as ineffective. Unless the Federal Reserve loosened monetary policy at the same time, the result of intervention would be temporary at best. Market concerns about foreign exchange intervention probably explain the weakness of the US dollar during the Monday session.

The trade war evidently has contributed to the sharp slowdown in US economic growth. On Monday the National Association of Purchasing Managers reported the worst print in three years for its widely-followed services gauge. It had reported an even weaker number for manufacturing last week. Tax increases are not the recommended treatment for a slowing economy. Trump, as I wrote last week, is risking a recession by raising taxes on imports.

In my view, all of this was foreseeable and avoidable, and I warned a year ago that it would not end well. The US president made the mistake of attempting to negotiate the future of a complex global supply chain as if it were an Atlantic City real estate deal.

Equity investors have a good idea of what comes next. The worst performer among the S&P 100 is the leading chip design firm Nvidia, down nearly 7%. Nvidia earns about 70% of its revenue in Asia. The broad semiconductor index SOX has lost 8% during the past three trading sessions.

The US tried to pressure China by cutting off exports of key electronic components to Huawei, the Chinese national champion in telecommunications. Huawei and other Chinese firms, meanwhile, have been hard at work on chip designs that rival the best that America has to offer; for example, Huawei’s mobile “Kirin” processors and its Ascend line of chips for large-scale data analysis. China’s chip designers may start a price war to seize market share in Asia and push their American competitors out of the market.

Trump’s other attempts to put pressure on China have failed. The ban on exports to Huawei has not hindered the telecom giant from proceeding with the rollout of 5G mobile broadband on the whole of the Eurasian continent as well as England. The US also signaled that it would stop Huawei, the world’s second-largest handset manufacturer, from obtaining updates to Google’s Android operating system.

Huawei responded by readying its own operating software. All of the American non-tariff measures against China have backfired.

It is far from clear where the trade wars will go from here. For a US president who gauges his success by the stock market, the five-day descent of the major American stock indices cannot be encouraging. But the administration’s combination of bluff and bluster makes de-escalation difficult.

In many ways Trump is the victim of his own success. So skillfully has Trump shaped public opinion about China that he is the victim of his own success. If he appears to show weakness in negotiating with China, his Democratic opponents will savage him.

That leaves us with an all-or-nothing outcome, with nothing looking a bit more probable at the moment. Presidents Trump and Xi could announce a grand deal (or at least something that can be framed to look like a grand deal in the dusk with the light behind it). That would include Chinese farm and fuel imports, some mechanism for dealing with intellectual property issues, China opening its financial sector to directed foreign investment, and so forth.

Or they could do nothing and let the escalation proceed. China evidently believes that its economy will weather another year or two of trade war as well as it did during the past year.

Most of China’s economic indicators are stable, and raising at an annual rate of 5%-10%, after a year of trade war. China will fight rather than fold, which leaves President Trump with no easy alternatives.