Game Theory Between The U.S. and China
Before taking this class, I have totally no idea about game theory. I have learned that game theory is used to determine whether the strategic actions of players affect each other in a fundamental way. Game theory can be used to analyze everything, for example, the recent trade war between the U.S. and China.
Therefore, I found an article talking about how the trade war would affect the U.S. and China. The author John Authers discussed how Donald Trump tried to avoid imposing tariffs as scheduled since he figured out that Americans should pay these tariffs not the Chinese. I agree with his opinion that there will be no winner in this game between those two nations. In addition, I believe this game will last a long time since both countries do not want to lose face and there is little probability that two countries can negotiate a good and lasting conclusion.
Based on my learning of game theory, I have conducted the following matrix to apply game theory in this trade war and to analysis what the outcomes will be. This matrix will show the payoffs to both countries when two strategies are played together: imposing tariffs and maintaining Free Trade.
For the U.S., if China chooses to impose tariffs, then the best practice will be to impose tariffs. If China chooses to maintain free trade, then the best practice will be to impose tariffs. For China, if the U.S. chooses to impose tariffs, then the best practice will be to impose tariffs. If the U.S. chooses to maintain free trade, then the best practice will be to impose tariffs. The Nash Equilibrium in the above game is: to impose tariffs & to impose tariffs since they are the BRs for each other.
According to my analysis, when the tariffs are imposed, the payoffs for both China and the United States are the least. If both the countries coordinate, then the payoffs would be much higher. However, as John indicated, neither of the U.S. and China would like to coordinate. Both countries choose to go against each other and will result in a lower payoffs. In my opinion, it will definitely affect the economic profits and welfare of both countries.