Information Cascades and the US Trade War on China
https://thediplomat.com/2018/08/why-the-us-trade-war-on-china-is-doomed-to-fail/
The trade conflict between the US and China is predicted to cause an economic decline in China, but this article debunks this notion with testimony from economists who believe that it isn’t so easily predictable. Information is crucial in shaping the decisions of economic stakeholders, so information influences the entire economy. The article claims that “a major difference between the West and China is that financial information is proactively screened by the government,” and because of this difference, the government can slow down the spread of information to stakeholders, giving “regulators” time to prevent crisis. Intervention by the government, writes the author, is crucial in stabilizing the economy, especially when it is in crisis, because we exist in a world where big corporations and banks can be “too big to fail, too interconnected to fail, too correlated to fail” and therefore majorly affect the economy. The information asymmetry produced by the control over information by government decreases the need for trust in the market and legislators that we see in the West.
This relates to what we’ve learned in class in that it’s an example of an information cascade. In this case, once any economic information is released by the government, it spreads through society via a cascade; when some people know more economic information, they will make economic decisions based on that information, then others will copy their decisions without knowing the information once enough people around them have made that decision. The definition of an information cascade as presented in lecture is copying what others do based on information that they (not you) have, and we can see that this aligns with what happens when one source spreads economic information to regulators that affects all economic stakeholders. If the government was completely transparent about finances, there would not necessarily be a cascade, because there wouldn’t be one group of people that got the information first (the regulators). The article argues that the information asymmetry due to government control of information slows down the information cascade, but this is not necessarily the case, because it also creates a cascade by giving some people information before others; if financial information were actually more transparent, a cascade may happen if some find out information first and others don’t access the news (financial literacy could be a major barrier, for example) but there is no guarantee that a cascade would even occur. Of course, there’s never any guarantee of a cascade, because financial information may not affect people’s current decisions at all.