A Game Theory Analysis of Donald Trump’s Proposed Tariff on Chinese Exports
A Game Theory Analysis of Donald Trump’s Proposed Tariff on Chinese Exports
https://www.tcd.ie/Economics/assets/pdf/SER/2017/9trump.pdf
Commentary on paper:
This paper starts with the introduction of basic concepts of international trade, free trade and protectionism. The author then introduces Trump’s strategic trade policies and summarizes four possible scenarios about how the U.S. and China are going to act in trade war, which is a representation of a prisoner’s dilemma situation. ( Diagram1: T refers to Tariff and F refers to Free Trade.) Different from Prisoner’s Dilemma that people decide whether they want to confess, in this case, the two countries need to decide whether they want to free trade or impose tariffs. One thing that is worth to notice is that both countries will receive higher payoff if they choose to free trade. This paper also illustrates how to find the Nash equilibrium. In this case, NE is when both countries impose tariffs. Even though it is their best response, they could’ve coordinated and receive better payoff. This paper also provides a deeper understanding of the complexity and uncertainty in the trade war. The author also points out that the results of the trade war depends on whether the U.S. government are going to deal with the aggressive or tactical Chinese government.
(Diagram1 )
| USA\China | T | F |
| T | 2,2 | 5,0 |
| F | 0,5 | 4,4 |
How this paper relates to class:
I found this paper related to game theory as we discussed in the class. In the class, we analyzed the Hawk- Dove game, which is pretty similar to the U.S. and China trade war scenario. However, we must realize that in the real world, there is no perfect game. When it comes to politics, economics and other third organizations such as WTO, the situation can get a lot more complicated. A tricky thing here is that Chinese government and the U.S. don’t make decisions simultaneously. If the U.S. government decides to impose tariff on Chinese exports, Chinese government actually has enough time to consider how the economy is reliable on exports and the consequences of imposing tariffs such as slowing down economic growth. Even though this example is very similar to the Game Theory, we need to consider more factors when it comes to real application. For example, Trump’s ultimate goal is to create more domestic employment opportunities and starting a trade war with the second largest economy in this world is not necessarily the best idea. This paper also suggests other strategies such as subsidization to domestic research or encouraging domestic innovation. I think this paper serves a perfect supplementary material and make us to think how to apply Game Theory model in a more complicate real-life case.