US China Trade War #Game Theory
Article: Using the Game Theory to Explain the US – China Spat
Recently, the trade war between US and China has been a hot topic of discuss. The article talks about how the trade war was initiated, and uses game theory to explain why it continually heats up and has no signs of reconciliation.
According to the article, their incentive might be to probe each other’s weaknesses and to test each other’s resolve in order to get a better trade deal, which worked for US when it threatened South Korea with steel and aluminum tariffs. They both, hoping that each other will make concessions, keep escalating and bluffing. Such tit for tat strategy seems to be a miscalculation in this case. US and China both performed series of actions in order to retaliate, such as “US charging duties on $50 billion worth of Chinese Imports” and “China planning to take comprehensive and quantitative measures to fight back”. No one’s backing down and they were not able to make a collective agreement yet. If such dilemma does not stop, the result would be high tariff barriers and a reduction in cross border commerce that leaves both sides worse off.
This topic related to our course concept of Game theory as well as the example of Prisoner’s Dilemma. This trade war can only end up with four potential results: Both sides back down; China blinks; the U.S. blinks; or both sides keep escalating. Just like the case in the Prisoner’s Dilemma, both sides backing down, which now seems unlikely in the short term, is supposed to be the optimal way of settling. However, the self-interests prompt both sides to escalate, hoping the other side would first blink. Therefore, the nash equilibrium eventually falls on the fourth result, which is the most damaging but inevitable.