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The Trade War between the U.S. and China: A Prisoner’s Dilemma

https://www.ft.com/content/d288a98e-2e90-11e8-9b4b-bc4b9f08f381

It’s been almost three months since the Trump administration imposed its first round of tariffs on some $34 billion of Chinese goods. In that time, economists and investors have projected various iterations of a dismal domino effect in which the U.S and China repeatedly retaliate with tariffs against one another. In his article “Trade wars and the prisoners’ dilemma,” Gavyn Davies draws connections between this tit-for-tat tariff game and the classic example of the prisoners’ dilemma.

Davies highlights the fact that, if the U.S. and China are truly engaged in a non-cooperative, prisoner’s-dilemma style game, they will likely end up in a “bad Nash equilibrium,” where both countries’ payoffs are worse than if they were to simply cooperate with each other. Specifically, assuming that each country continues to choose strategies that protect its best interests in a time of uncertainty, it’s likely that there will be 1-3% reduction in global output in the next several years.

In its entirety, Davies’ article demonstrates that the game theory logic underlying the prisoner’s dilemma is omnipresent. Almost every economist and investor examining the impacts of the budding trade war has assumed that the two countries will continue to retaliate against one another without cooperation. Their models paint a dismal (albeit realistic) picture of this trade war’s global repercussions. Still, economists and investors might be better off employing the same game theory logic to illustrate the mutually beneficial benefits of cooperation.¬†Perhaps the prisoner’s dilemma will help to show how cooperation, not just among inmates, but among countries can lead to better payoffs than self-preserving strategies.

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