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Game Theory Applied to the Trade War

This article uses game theory, a theory discussed extensively in class, to analyze the trade war between China and the United States. Game theory predicts that the trade war could potentially be more prolonged than expected. In less than a year, the United States essentially entered into a trade war with the majority of the world. Before this whole trade disaster started, the US and China had mutual trust in one another. The trust between the two started disappearing when China started trying to force US companies in its country to disclose trade secrets. In retaliation, which also led to further distrust among the two, the US started imposing tariffs on Chinese imports.

According to game theory, it is generally difficult to regain lost trust and it is actually rational for countries to engage in trade wars as it is in their personal interest to do so. An aspect of game theory is Nash Equilibrium. In this situation, game theory says that a trade war is “the stable state of things.” According to New York University business professor Arun Sundararajan, “both countries imposing tariffs is the Nash Equilibrium of the game.” From the United States’ perspective, its best response to China both imposing tariffs and not imposing tariffs on US imports is to impose tariffs on Chinese goods in either scenario. Because of this conclusion, it’s likely that this trade war will continue for a long time. In order to change this Nash Equilibrium, something dramatic must occur. One potential way to disrupt this Nash Equilibrium and re-establish trust between the US and China is to have other countries facilitate negotiations between the two countries that could possibly lead to a friendlier trade agreement with more trust. In conclusion, because of the current state of the trade war, according to game theory, this trade war will likely ensue for at least the next couple decades.


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November 2018