How and why might this scenario materialize? Actually, strong arguments could be made from the perspective of both countries that decoupling is the most sensible course of action.

From China’s perspective, the argument could be made that the flurry of unilateral trade actions taken by the Trump Administration have proven that the US has become an unreliable and erratic trade partner. As a result, the primacy of the US as an export market can no longer be assumed, and more importantly, China’s reliance on US technology is no longer tenable — and in fact creates a glaring vulnerability. Therefore, the prudent course is to shrink the degree of economic interdependence between the countries.

Under this scenario, you would likely see China ramp up efforts to develop domestic technological capabilities, especially in semiconductors. Policies aimed at further increasing the portion of GDP that comes from domestic consumption would be strengthened and expanded. And to the extent that exports still matter (as they will), alternative markets would be aggressively developed in order to limit exposure to the US.

For an entirely different set of reasons, the same conclusion – decoupling — could be arrived at from the US point of view.

The argument being made – and increasingly accepted – in US policy circles is that the decision to integrate China into the global trade system has proven to be a massive miscalculation. It was assumed that China would wholeheartedly embrace both the letter and spirit of global trade rules, that any economic and labor dislocations in the US could be effectively managed, and that China would inevitably gravitate towards a smaller government role in the economy and greater political freedoms.

All of those assumptions to one degree or another have proven to be incorrect. China’s compliance with its WTO obligations has fallen short. Economic and labor dislocations in the US have been more severe than expected and efforts at smoothing the adjustments have been woefully inadequate. And the centrality of the Chinese government in the economy is if anything increasing.

According to this line of reasoning, China’s economic integration has been massively beneficial for China, but — on balance — a losing proposition for the US. Therefore, the only sensible course from the US perspective is to begin the process of reversing the economic interdependence.

Given current circumstances, there is a fairly strong likelihood that this scenario could materialize.

2. Cease fire agreement, followed by longer term peace negotiations

The second potential scenario is a cease fire agreement, followed by longer term peace negotiations. Under this scenario, the US and China would essentially press the “pause button” on their trade disputes, agree to refrain from any further escalation or trade actions, and commence a longer term negotiation on the underlying fundamental issues.

The stage is set up nicely for this scenario. The upcoming G-20 meeting in Argentina will provide an opportunity for President Trump and President Xi to meet, and we know from previous experience that President Trump likes to emerge from such meetings with grand pronouncements and major breakthroughs. The “breakthrough” in Buenos Aires could be a stand-down agreement on further escalations and the announcement of an intensified negotiating process on the underlying issues.

Then the hard work would begin. All of the specific trade disputes we currently see playing out between the US and China reflect one fundamental underlying issue: we have not yet worked out how China’s state-directed capitalism and quasi-mercantilist trade practices can be accommodated and dealt with in a trading system which has been based on ostensibly free market, free trade principles embodied in the Washington Consensus.

The challenge for negotiators would be to work out an accommodation or a modus vivendi that would allow these two different systems to coexist. If even possible, that would not be easy or quick.

The rationale for pursuing this approach would be a realization on the part of both countries that a protracted trade war would be too disruptive and destabilizing, and that the only real alternative is to find a way to live together. However, President Trump believes that maintaining the status quo would favor China’s current modus operandi.

There is fairly strong likelihood that such a scenario could materialize.

3. Quick deal