Chinese-made hats are displayed for sale at a Manhattan department store in New York City, US, May 7, 2019. (Photo :VCG)
The China-US trade war just escalated as US President Donald Trump announced on May 5 an increase in tariffs from 10 percent to 25 percent on 200-billion-US-dollars worth of imported Chinese goods. It took effect on Friday (May 10).
Although the latest round of consultations ended in Washington without reaching a deal, China and the US have agreed to hold more talks on trade in Beijing in the future.
We wrote previously how trade wars can be considered in a game-theory framework, and particularly, the Prisoner's Dilemma, played out between two players, each independently deciding whether to "cooperate" or "defect."
In the Prisoner's Dilemma, mutual cooperation (reducing/eliminating tariffs on each other's imports) provides the best outcome for both parties, but the grim equilibrium is mutual defection (trade wars, with escalating tariffs that hurt both parties, and the global economy).
Behavioral game theory (BGT) incorporates psychology and emotions into the mix. It explains how negative emotions, such as anger, can lead to defection and retaliation, leading to an escalation of the trade war.
On the other hand, the positive message coming from BGT is that positive emotions and empathy between the nations could lead to cooperation and a reversal of the trade war.
According to the BBC, "China has been a frequent target of Donald Trump's anger." The BBC website goes on to state that Beijing "deeply regrets" the move by Trump, and "has vowed to retaliate."
This is the classic tit-for-tat strategy in the Prisoner's Dilemma, identified by game-theorist Robert Axelrod. Furthermore, the website notes that it is unclear why the US president has acted in this way, and it has taken China by surprise. The BBC states that "Ahead of the discussions, Mr. Trump told a rally China broke the deal and would pay for it."
Thus, it is clear that the US president came into the talks already in a negative, irrationally angry frame of mind. Perhaps, because of this, the talks were doomed to fail! A telling message from behavioral game theory is that irrational negative emotions can result in retaliation that is costly not only to the recipient of the anger, but also to the retaliator.
Trump's irrational action of "making China pay" not only hurts China, but also the US, in two ways. It not only sparks a potential escalation of the trade war, it also hurts many US companies, who import Chinese goods, and who will now see their costs rise massively, as tariffs increase from 10 percent to 25 percent.
Economists argue that these massive cost increases will inevitably be passed onto US consumers. And the escalating trade war will also hurt the global economy. According to the South China Morning Post, the International Monetary Fund (IMF) has warned that the trade war could cost the global economy 430 billion US dollars, and that the US may find itself the target of global retaliation.
So, what is the answer? Encouragingly, the BBC website suggests that China recognizes the damaging effects of trade wars, and "are still willing to negotiate to retain the moral high ground." Gary Hufbauer of the Peterson Institute for International Economics states: "Better for China to play the role of a conciliatory statesman than angry retaliator."
Will the conciliatory approach succeed? Can it create empathy and cooperation between the US and China? If not, it may be time to go back to an independent third-party, the WTO, in an attempt to solve this long-running and ongoing dispute!