Avi Salzman writes for Barron’s about discouraging signs in the federal government’s trade fight with China.

Losing a trade war would be a catastrophic blow to the national psyche of China or the U.S. But there’s something even more dangerous than losing: thinking you can “win.”

Both sides in this fight now seem to be gaining confidence in their ability to prevail, and that’s why investors should worry. Portfolio managers and strategists said this past week that they’re re-evaluating their portfolios—not to exit the market completely but to focus on investments that can withstand a longer and costlier phase in the trade war. …

… The U.S. can claim a kind of victory because the latest trade data show that China is faring far worse from the trade slowdown. China’s second-quarter GDP grew at its slowest rate in at least 27 years. Chinese exports to the U.S. fell by $5.6 billion in June, versus a $1.8 billion drop for U.S. exports to China. (Mexico just surpassed China as the top trading partner with the U.S.)

Numbers like these are “increasing the likelihood that President Trump will make good on his threat to apply duties to all Chinese exports from Sept. 1,” wrote Panjiva analyst Chris Rogers. China hawks have been emboldened.

Trump also may be emboldened by the Federal Reserve’s recent swing back to an accommodative monetary policy, argues Morgan Stanley strategist Michael Zezas. The administration may think a trade-war escalation could lead to a “quicker, potentially more aggressive Fed stimulus response that could help the economy heading into the election,” Zezas says.

China has reason to believe that it can “win,” too, particularly as Trump faces more political risks heading into the 2020 election. China learned this past week that it can also inflict pain on the U.S.