Two Hawks & Their $200 billion Trade Game
https://www.wsj.com/articles/both-sides-can-win-the-trade-war-1534200232
Since January of 2018, the US and China have been playing a trade game. Game theory deals with situations where players have different strategies and respective payoffs. Since June of 2018, US and China have both used intense hawkish strategies – stating that each would impose billions of dollars of tariffs on the other’s goods – to learn more about the other player’s hands and the possible payoffs. On June 15, President Trump declared that he would soon begin imposing tariffs of $50 billion worth of Chinese goods. This action stemmed from President Trump’s initiative to boost consumption of American goods and decrease the amount of imported goods from China. China’s Ministry of Commerce countered Trump’s measure with plans to impose tariffs on produce goods. According to the article, China’s Pro – market reformers seek to cooperate with the US to support economic liberalization, but those adhering strictly to the Communist Party’s ideological roots decide to fight against the US by responding with higher tariffs on US goods.
According to Game Theory, the pure Nash equilibria would be found where the US acts as a hawk, and China a dove, and vice versa. In our context, both countries would act as hawks until one country finally bends and plays a dove. Currently, both countries seem to think that they have advantages over the other country – the US recently threatened to impose tariffs on $200 billion worth of Chinese goods; China countered right back with a “go ahead and see what happens.” However, slowly, each side will learn of each other’s strategies and payoffs and realize that they might not have any advantages or payoffs from both being hawks. Also, the two countries could be viewed as being trapped in a prisoner’s dilemma. However, until the two countries could come to a collective agreement and communicate each other’s strategies and payoffs, there will be no escape and the trade game will continue.