The timing of these threats is particularly troubling. They come at a time when credit markets are already fearful of contagion from subprime mortgage troubles. That may explain why Secretary of Treasury Henry Paulson said any trade sanctions would undermine America’s authority to promote free trade and open markets.

While some compromise with China is likely to be worked out, as it has been in the recent past, the backdrop for decision making is colored by the large sum of U.S. dollars sitting in Chinese hands. The Chinese government has allowed the yuan to appreciate 9 percent against the dollar over the last two years under a crawling peg, but it has not diminished the current account imbalance and the growing Chinese trade surplus.

From a strategic perspective the Chinese have a nuclear arsenal to thwart American interests in Asia and now have a financial nuclear option to influence U.S. political judgments as well.

Where this will lead is hard to say. But on the central issue no guess is needed: American options are circumscribed by the real threats China may impose.

China is not an enemy of the U.S., but neither is it a friend. Recognizing the potential collision of interests in the Taiwan Straits and elsewhere, it is best to keep in mind the dangers that could result from an entangling relationship. Unfortunately this has already occurred and it is not possible to see how the U.S. easily extricates itself from the entanglement.