The Game Theory Behind the US-China Tariff War
This article explores the application of game theory, specifically the "game of chicken," to understand the dynamics of the US-China tariff war. It examines why seemingly irrational actions can be the result of calculated strategies and the potential dangers of such a standoff.
Introduction: The Escalating Tariff War
On April 2nd, the US imposed tariffs starting at 10% on goods from across the globe, including China, with initial tariffs reaching 34%. China responded with equivalent retaliatory tariffs, causing a drop in the US stock market. The US subsequently increased tariffs further, prompting reciprocal actions from China. This escalating cycle raises the question: Why does this great power competition resemble a childish squabble?
The "Game of Chicken"
The US and China have found themselves in a classic "game of chicken." This video aims to explain the basics of game theory and how mathematics can model and analyze conflicts like this. Even for those familiar with game theory, this analysis may provide deeper insights and spark new perspectives on real-world events.
Understanding the "Game of Chicken"
The "game of chicken" is vividly portrayed in the movie Rebel Without a Cause, where two cars race towards a cliff, with the first driver to swerve being labeled a coward. In reality, the game involves two cars driving towards each other. The driver who swerves first is deemed the "chicken" and faces ridicule and financial loss. If both swerve, they avoid a collision. However, if neither swerves, a catastrophic collision occurs.
Modeling the Game: Payoff Matrix
This game can be modeled with a payoff matrix. Each player has two options: "Straight" (continue driving) or "Swerve". The outcomes determine the payoffs:
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A Straight, B Swerve: A wins (+10), B loses (-10).
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B Straight, A Swerve: B wins (+10), A loses (-10).
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Both Swerve: Both receive 0.
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Both Straight: Catastrophic collision, both lose (-1000).
This matrix illustrates a unique game where the goal is to maximize individual gains. The essence of the "game of chicken" lies in determining who is more "daredevil".
The Paradox of Rationality
A key paradox emerges: rationality dictates self-preservation, urging players to swerve. However, if both expect the other to swerve first, neither will, leading to a potentially fatal collision.
Tariff War as a Game of Chicken
In the tariff war context:
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"Straight" corresponds to raising tariffs.
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"Swerve" corresponds to backing down.
One side raising tariffs while the other backs down results in a minor economic loss for the conceding party. However, both sides imposing high tariffs leads to trade decoupling, job losses, supply chain disruptions, and a potential economic crisis for both nations, akin to the catastrophic collision.
"Game of Chicken" in International Relations
The "game of chicken" is prevalent in international conflicts. "Straight" represents maintaining a hardline stance, while "Swerve" represents conceding. The Russia-Ukraine conflict exemplified this, with Russia threatening nuclear action if NATO continued supporting Ukraine, attempting to force NATO to "swerve". The US responded by refusing to flinch, creating a dangerous standoff. The Cuban Missile Crisis was another stark example, where the world teetered on the brink of nuclear war.
"Game of Chicken" in Everyday Life
The "game of chicken" manifests in everyday situations. Consider a couple in a cold war, neither willing to apologize first. Each wants the other to concede, potentially prolonging the conflict and damaging the relationship. Both are essentially playing "straight," hoping the other will "swerve," risking a complete breakup.
The Underlying Dilemma
The "game of chicken," like the prisoner's dilemma, highlights a fundamental problem. While cooperation (both swerving) is the best outcome, the temptation to exploit the other's cooperation by "straightening" is strong. This is a form of bullying.
The Logic of the "Bully"
If A knows B will always "swerve," A may be tempted to always "straighten" for personal gain. This allows A to intimidate B into swerving by convincing B that A is willing to drive straight ahead.
The logic behind street thugs or reckless drivers follows this pattern. By exhibiting irrationality and disregard for personal loss, they force others, who are more risk-averse, to "swerve" to avoid greater costs. This illustrates the saying: "The timid fear the bold, and the bold fear the reckless."
The Role of Deadlines and Urgency
Often, one party will initiate a countdown, creating a sense of urgency. For example, a teacher demanding a student who threw a paper ball to confess within a countdown. This tactic leverages proximity. As the "cars" approach collision, time dwindles, forcing a decision. The party less willing to bear the consequences will "swerve" before reaching their breaking point. The ultimatum emphasizes the imminent collision, pressuring the other party to concede.
The "Burn Your Bridges" Strategy
A radical strategy involves the driver inviting the other into their car, welding the steering wheel, and throwing it away. While limiting options is generally disadvantageous, in the "game of chicken," demonstrating irreversible commitment to a collision can be incredibly effective, deterring opponents. This strategy is about convincing your opponent that you are willing to suffer the consequences no matter what.
This is analogous to the historical example of Xiang Yu's army destroying their cooking utensils and sinking their ships before the Battle of Julu. This demonstrated their unwavering resolve and instilled fear in the enemy.
The Perils of Miscalculation
The "game of chicken" involves constant probing of the other party's limits. However, escalating tensions can lead to miscalculations. During the Cuban Missile Crisis, both sides underestimated each other's resolve, leading to a dangerous escalation.
On October 27, 1962, a Soviet submarine, B-59, lost contact with Moscow and, believing that nuclear war had already begun, nearly launched a nuclear torpedo. Only the intervention of the second-in-command prevented a catastrophe.
The Nature of International Relations
The question arises: why do nations resort to such perilous strategies? The answer lies in the nature of international relations. At the international level, there is no overarching enforcement mechanism to compel adherence to treaties and laws. As such, countries often engage in primitive, jungle-like conflicts.
Conclusion
The "game of chicken" and the prisoner's dilemma offer insights into the complex dynamics of international relations. Understanding these game theory concepts can provide a framework for analyzing real-world conflicts and the often unpredictable behavior of nations. The author intends to create more videos on Game Theory in the future.