Spiegel has published an article on US President Trump’s strategy in pursuing what looks like a trade war with both the European Union and China. The article uses game theory to reveal the US strategy prior to Mr. Trump’s election and how he wishes to undermine this strategy with bilateral trade agreements.
“This development isn’t without irony. It was largely the United States that initiated the General Agreement on Tariffs and Trade (GATT) after World War II and later the WTO. It enabled the U.S. and other countries to escape a dilemma they were facing. ‘It’s the prisoner dilemma that explains the existence of the WTO,’ says Gabriel Felbermayr, director of the ifo Center for International Economics in Munich.
“Under this game theory model, two prisoners who have been accused of a crime committed jointly are interrogated separately. If neither says anything, then they are both convicted and sentenced to shorter jail sentences for smaller, provable offenses. If only one confesses, then that prisoner is freed and the other receives the stiffest sentence. If both confess, then both get stiff sentences, but not the stiffest. The dilemma for the prisoners is that they are unable to coordinate their responses. That’s why the rational decision is for both to confess to avoid the maximum penalty. But the two would be in a better position if they had been able to cooperate with each other.
“It may also be just as rational for two countries to protect their own economies through tariffs, but if both of those countries make the same decision, then both will fare worse economically than they would have if they had cooperated in ways that could have benefited both.”
Mr. Trump prefers the game of chicken to the prisoner’s dilemma game. In chicken, one eschews the possibility of cooperation with any others other than the principal target. In chicken, one either chooses to concede or die. In such a game, then bluster becomes an essential tactic to intimidate the possible trading partner.
Prisoner’s Dilemma
The trade talks with China did not go very well. Had they gone well, many analysts had expected that Chinese President Xi would meet with the US negotiators. No meeting took place–the Americans simply left Beijing with little fanfare. The US negotiator, Robert Lighthizer, is a well-known hardliner on the issue of trade, and the US position reflected that hardline. According to The Economist:
“The American demand that made the most headlines was that China should cut its massive bilateral trade surplus by $200bn by the end of 2020. That would amount to a roughly 60% reduction in China’s surplus within three years, which is far from credible. But numbers are at least negotiable. More troubling from China’s perspective were demands focused on its economic policy. The Americans asked China to stop providing subsidies to a range of sectors that the Chinese government has deemed strategic, from robotics to electric vehicles. They demanded that Chinese tariffs on American products be no higher than American tariffs on Chinese products. And they told China to open its market much more widely to foreign investors, setting July 1st as a deadline.”
These demands are non-starters, and it is not unusual for opening negotiating positions to be extreme. But, given that the meeting was in Beijing and that Lighthizer led the delegation, the Chinese likely did not interpret the US position as a bargaining gambit. More likely, they interpreted it as an insult. The judgement of The Economist was: “Taken in its entirety, though, the American position amounts to a demand for a new economic model in China.”
Diplomacy is often a matter of paying excruciating attention to the specific culture of the interacting parties. There have been some stunning faux pas in recent history/ In 2000 German Chancellor Gerhard Schröder visited the Yad Vashem Holocaust Memorial, guided by Israeli PM Ehud Barak. There is an eternal flame burning at the memorial in honor of the millions killed in the Holocaust. Schröder turned the switch in order to make the flame higher. Unfortunately, he turned it the wrong way and extinguished the flame. Efforts to relight the flame failed until someone came with a cigarette lighter. The tables were turned in the recent visit by the Japanese Prime Minister, Shinzo Abe, to Israel. He was hosted by Israeli Prime Minister Netanyahu at a dinner that was, by all accounts, fabulous. Until dessert. The dessert was put into a shoe designed by renowned artist Tom Dixon. Unfortunately, anyone who knows Japanese culture knows that shoes are forbidden in the house and putting a shoe on the dinner table was a gross insult. It is time for Netanyahu to get a new protocol officer.
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