Network Exchange Experiment using Tariffs
https://www.ft.com/content/d46e0386-f4fd-11e9-b018-3ef8794b17c6
Wilbur Ross has hinted at new talks with the EU over a previous threat to raise tariffs on automotive imports for the month of November. Ross says Donald Trump has the option to choose how he will negotiate for the tariffs, and whether he will do something, or not act on the threat at all. The tariffs have created a huge strain between relations with the EU and has clouded the future of the global economy. The automotive tariff would, if enacted, apply to all international trade of cars and car parts with the United States. However, other parts of the world are less worried than the EU as the Trump administration has already formed agreements with big industrial players that would protect them from the tariffs. It appears the EU and the US have entered a strange power struggle within the automotive industry which will be further analyzed in the next paragraph.
This power struggle between the EU and the US almost mirrors a simple network exchange between two nodes. Although the actual graph would have much more nodes, they can be ignored because the US has already made “exchanges” with these nodes. The case with multiple nodes will be examined afterwards. In this particular network exchange problem, the every node can make exchanges with exactly as many nodes as it is connected to. However, each node also has the option to not make an exchange with any node or one node in particular. This would take the place of a time limit for regular network exchange experiments since the time scales considered here are quite lengthy. As such, they will be ignored for easier analysis. In this first network exchange experiment, it would make sense for both the EU and the US to agree to not raise tariffs for each other. In this scenario, the balanced outcome would give both the EU and the US “half” the exchange for each. In the next case, with multiple nodes, the power of the US node increases significantly. Although the EU can also make exchanges with other nodes, the exchanges with the US must be made to maximize its own profit. As such, the US will not even care about trading with the EU if all other If we change the experiment a little further, in which exchanges with the US give more than exchanges with other countries, this is much more evident. If perhaps the exchange with the US is $100, and all other countries are $10, the US now has even more power over the EU and the EU has even more incentive to trade with the US.