Tariffs and Game Theory
There’s been some economic tension between the United States and China with regard to tariffs on imported goods between the two countries. Recently, Trump announced his plans to impose tariffs of $200 million on Chinese imported goods as a way of enforcing what he believes are fairer terms for international trade. Though these tariffs affect relatively small portions of the respective countries at this point, the article notes that there’s an “ante up” situation appearing, where the introduction of one tariff is met with the retaliatory introduction of another. As the article explains, the worry is that enough tariffs building on one another in such a fashion could evolve into a full-on trade war, where both countries end up hurting economically just to prevent the other from gaining an advantage.
The cool thing is that the core of the article (and of the issue it discusses) ties very nicely with what we’ve learned about game theory in class. On a macro scale, each country (the United States and China) can be thought of as players in a game, and the imposed tariffs on different goods can be thought of as strategies by each of those players. Applying this view of game theory and payoff matrices, we can look at a “real world” situation through the lens of a game. In particular, the nature of tariffs (as mentioned in the article) is analogous to the “arms race” scenario we learned about in class. In our case, the economic strains between the two “players” moves us into a scenario where there’s an incentive to keep “upping the ante” (i.e. imposing more and more tariffs). If one player (country) choses to obey the other’s imposed tariffs without imposing their own, they’ll suffer an economic cost. Interestingly, the article touches on a fundamental piece of “arms race” games, which is that there exists a scenario in which both players are still evenly matched, but their payoff is larger when neither pushes for more tariffs. This idea pertains to the article because the pre-tariff-tension situation between the United States and China had economic payoffs for both, but now that one country has “lit the fuse”, there’s an incentive to continue piling on tariffs in retaliation, moving us further and further into a scenario where each country remains evenly matched, but our payoffs are lower than if this tariff “war” hadn’t begun in the first place!