Tariffs War as Example of “Bad Nash Equilibrium”
President Trumps announcement in late March about trade relations with China, as well as China’s response, has markets and investors on edge. This is largely due to the economic damage an increase in tariffs (relating to the global economy). Not only would a tariff on US imports decrease the US GDP but will likely result in other nations retaliating against us since their GPD would also decrease (and more than ours!). This would result in other nations such as China and the EU imposing tariffs on US exports, causing some of the US sectors, such as agriculture, to struggle significantly. This retaliation back and forth would be continued as every nation does something that hurts the other’s economy. By placing a tariff on US imports, the US would be suffering output losses since other countries will want to retaliate by imposing tariffs. This would cause all countries to be worse off.
However, the reasons other countries would retaliate would be to make the best of the situation, not necessarily to harm themselves. These increase in tariffs could lead to an overall trade war. This related to our networks class through the concept of the prisoner’s dilemma. Other countries and the US could cooperate and gravitate towards a good equilibrium, but instead choose to, as Davies puts it, “decide that their overall welfare … is to impose retaliatory measures” and “gravitate towards a ‘Bad Nash Equilibrium’” (Davies 2018). In talking about finding the optimum Nash Equilibrium that is best for all in class, this example resonated as one that shows it is often difficult since other factors such as political ties, fears, and pride can get in the way of finding an equilibrium.
https://www.ft.com/content/d288a98e-2e90-11e8-9b4b-bc4b9f08f381