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Playing Games with Trump: Game Theory and the Trade War Against China

For the past year,  the ongoing trade war between US and China has continued to escalate. Up until now, the following events have unfolded:

  1. Trump announces tariffs on Chinese imports
  2. China responds with tariffs on US imports
  3. Trump threatens to add on even more Chinese goods to be subject to tariffs
  4. China warns that they will respond equally as harshly if US follows through with the threat

 

The current situation could be modeled with the following payoff matrix:

The players are US and China, and the strategies are to either keep fighting in the trade war, or back down. For the both countries, continuing to fight and waiting for the opposite side to back down is the most individually optimal outcome, while the both backing off is less optimal, and continuing to fight is the least optimal, as the consequences of all the threats could severely impact their economies at the very least, if not the entire global economy. This model resembles the prisoner’s dilemma, in which the nash equilibrium is to both continue fighting in this trade war.

However, the reality of a real-world trade war, particularly this trade war,  is far more complex than a conceptual game theory model. On top of the usual outside variables that can affect this game theory model, there’s the additional wildcard that is Trump’s unpredictability. Added all together, the outcome of the trade war seems to be heading strongly towards a fight-fight direction, whose ultimate outcome is unpredictable as much as it could be catastrophic.

Sources:

https://www.bloomberg.com/news/articles/2018-06-21/game-theory-explains-why-the-u-s-china-trade-spat-is-worsening

https://www.bloomberg.com/view/articles/2018-07-16/what-game-theory-says-about-trump-s-trade-strategy

How To Win A Trade War

 

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