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The Game Theory of the US-China Trade War

https://www.jstor.org/stable/2233549?read-now=1&seq=1#page_scan_tab_contents

One of the most pressing issues currently weighing on the United States economy is the trade war between China and the United States, initiated under President Donald Trump. A trade war, as discussed in Glenn Harrison and E.E. Rutström’s “Trade Wars, Trade Negotiations and Applied Game Theory” is clear example of game theory principles which heavily influence the actions of the parties involved. The paper discusses possible trade war scenario between the United States and the European Community (EC). In this scenario the authors analyze the payoffs based on whether each state keeps or repeals trade tariffs. Through this we can see that although both sides benefit from repealing trade tariffs (and having free trade) neither side will do that due to the idea that it is not a Nash equilibria. This means that the sides are forced to negotiate and trust that each other will stick to the terms of the agreement in for both nations (and the world to prosper).

I found this paper to be very compelling in expressing ways to view trade wars in terms of game theory. It is interesting to think that the Nash Equilibrium state is one in which each nation is imposing tariffs on another. This is more interesting when you consider the historic economic policy of the United States, which has largely been the promotion of free markets and a lack of tariffs. Only recently under President Trump has the United States looked to engage in a trade war as massive as the one with China. If we assume that before the trade war with China the United States was at a point where it was not enforcing tariffs while China was we can conclude that this trade war was inevitable. It would not make sense for the United States to not enforce tariffs if it would improve its outcome, even if it hurt the world’s economy in general. Now, knowing that tariffs from both sides is the Nash Equilibrium, we know that the only way these sides reach an agreement that is beneficial to both sides is if they agree to terms, and most importantly, trust that each party will stick to these terms. It will be interesting to follow this situation as it continues to evolve throughout the next year and into President Trump’s reelection year.

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