G7’s Prisoners Dilemma
In this opinion piece (from June 2018), Campbell Clark analyzes Trump’s tariffs on the European nations of G7 and Canada. This left the European nations to feel mistrust towards the U.S. Clark then goes on to explain the show, Friend or Foe?. Basically, two contestants are given the opportunity to win money. If they both pick “friend”, they split the money and if they both pick “foe”, neither gets the money. If one chooses “foe” and the other “friend”, the “foe” would take all the money. Clark basically uses this game as an analogy for Trump’s trade war. To impose tariffs is the same thing as picking “foe” in the game. And if both nations drop tariffs, it is the same as picking “friend” as they can both benefit from trading.
Trump often cites the U.S. trade deficits as a sign of unfair trade. Most of these deficits are with China, although these trade deficits do occur with other nations. The steel and aluminum tariffs were imposed on Britain and Canada. Clark states Trump “wants to be the winner who takes all… The President isn’t interested in splitting the prize.” Clark speculates Canada and the other G7 nations will be responding with their own tariffs on the U.S.
In this game matrix (I made up), we can see that if both nations impose tariffs, there will be losses for both countries. However, if one nation imposes tariffs and one does not, the country that imposed tariffs maximizes their gain. As we have seen in the prisoner’s dilemma in class, the dominant strategy in this case would be to impose tariffs. It is always the best response. Since there seems to be no cooperation right now, according to game theory, we can expect Country 1 and Country 2 both end up imposing tariffs. Although (-1,-1) is the Nash equilibrium, it is not globally optimal. So the U.S. and other countries may end up imposing tariffs on each other, but this would wind up economically hurting all nations involved.