Trade Wars, Irrational Yet Rational
https://www.ft.com/content/d288a98e-2e90-11e8-9b4b-bc4b9f08f381
In class, on our topic of game theory, we discussed the prisoner’s dilemma. A Prisoner’s dilemma is essentially when both parties are given the choice to confess or not confess. If they both confess they both lose big. If they both don’t confess they don’t lose at all. If one confesses and the other doesn’t the one who doesn’t confess loses bigger than if they both confess while the other doesn’t lose anything. If they both don’t confess they are both hurt slightly. Since both prisoners know the potential payoffs they choose what best benefits themselves even though the best option is to not confess for them both. The result is that both people will choose to confess since neither wants to be the sucker when the other person does confess.
In reality, there are so many factors that affect how decisions are made. The situation described above assumes that both sides don’t coordinate or have outside information on how the other will make decisions. In politics, that is hardly the case. However, in politics oftentimes prisoners dilemma is the model applied to show how all sides will lose given lack of cooperation and explain why certain countries would make these moves even though in the bigger picture, choices that benefit the whole group are readily available.
The trade war and its possible and current prospects are compared to prisoner’s dilemma since each affected country takes on a strategy of protecting themselves in this uncertainty. Many of the estimated numbers point to a decrease in US GDP as well as a decrease in imports and exports. The negative impact of tariffs apply also to other nations. Most people believe that the trade war will have a net negative affect, slowing down trade and economies in the long-run. So, it would make sense if people cooperated to avoid this. But, since each country acts on their own accord and based on predicting what the other side will do they take on the safe option leading to the dilemma that makes prisoner’s dilemma.
As of now, the article proposes that there will be a 1-3% decrease in global output over several years but given how the situation is uncertain, the consequences could escalate and become much worse. Here, prisoner’s dilemma is a simplified mirror for how everyone can do poorly or how countries can cooperate and hopefully avoid the worse case scenario.