Game Theory and the U.S.-China Trade War: Who Blinks First?
As of April 2025, the U.S.-China trade war has escalated dramatically, with the U.S. imposing tariffs up to 245% on Chinese imports, prompting retaliatory measures from China. This tit-for-tat escalation has led to significant economic disruptions globally.
Applying game theory provides a structured lens to analyze this complex standoff.
The Trade War as a Strategic Game
In game theory, the U.S.-China trade conflict resembles a classic Prisoner's Dilemma, where both parties face the temptation to defect (impose tariffs) rather than cooperate (maintain free trade). This often results in a suboptimal outcome for both.
Additionally, the situation mirrors the Game of Chicken, where each side escalates threats, hoping the other will yield first. This risky strategy can lead to mutual destruction if neither side backs down.
Strategic Moves and Countermoves
United States:
Tariff Escalation: President Trump's administration has increased tariffs to 245% on Chinese goods.
Economic Pressure: The U.S. aims to leverage its market size to force concessions from China.
China:
Retaliatory Tariffs: China has imposed its own tariffs on U.S. goods, signaling its unwillingness to capitulate.
Diversification: China is strengthening trade ties within Asia and promoting domestic consumption to mitigate reliance on the U.S. market.
Who Has the Upper Hand?
While both economies are suffering, China's centralized governance and long-term planning may provide it with greater resilience. Conversely, the U.S. faces internal political pressures and market volatility, which could compel it to seek a resolution sooner.
Potential Outcomes
Mutual De-escalation: Both nations agree to roll back tariffs and negotiate a new trade agreement.
Prolonged Stalemate: The trade war continues, leading to sustained economic harm globally.
One Side Concedes: Under mounting pressure, either the U.S. or China makes significant concessions to end the conflict.
Conclusion
The U.S.-China trade war, when viewed through the lens of game theory, highlights the complexities of international negotiations where national interests and global economic stability are at stake. While both sides have strategic reasons to maintain their positions, the mutual benefits of cooperation suggest that a negotiated resolution would be the optimal outcome.
The Trump–Xi Trade Saga: From Tariff Wars to Economic Brinkmanship
Since Donald Trump first assumed the U.S. presidency in 2017, his trade negotiations with Chinese President Xi Jinping have been a defining feature of global economic relations. Spanning two non-consecutive terms, Trump's approach to China has evolved from aggressive tariff implementations to a complex interplay of economic strategies and geopolitical considerations.
First Term (2017–2021): The Genesis of the Trade War
Upon entering office, President Trump prioritized addressing the U.S. trade deficit with China, accusing Beijing of unfair trade practices and intellectual property theft. This led to a series of escalating tariffs:
In 2018, the U.S. imposed tariffs on $250 billion worth of Chinese goods, prompting China to retaliate with duties on $110 billion of U.S. products.
The conflict culminated in the "Phase One" trade deal in January 2020, where China committed to purchasing an additional $200 billion in U.S. goods over two years. However, by the end of 2021, China had fulfilled only 58% of its commitments, falling short of the agreement's targets.
Despite these efforts, the U.S. trade deficit with China continued to grow, reaching record highs by 2020.
Second Term (2025–Present): Renewed Confrontation
Re-elected in 2024, President Trump resumed a hardline stance on China, implementing a series of aggressive trade measures:
Tariff Escalations: In early 2025, the administration imposed a 10% baseline tariff on all Chinese imports, which was subsequently increased to 20%. Additional "reciprocal tariffs" brought the effective rate on some goods to as high as 145%.
Chinese Retaliation: Beijing responded with tariffs of up to 84% on U.S. goods, suspended certain agricultural imports, and initiated investigations into American companies.
Economic Impact: These actions led to significant market volatility, with U.S. stock indices experiencing steep declines. Former Treasury Secretary Janet Yellen described the tariffs as the "worst self-inflicted wound" on a strong economy.
Diplomatic Dynamics and Future Prospects
Despite the escalating tensions, both leaders have expressed openness to dialogue:
Trump's Position: President Trump has indicated a willingness to negotiate, stating he would "love to make a trade deal with China."
China's Stance: Chinese officials have affirmed that "the door to talks is open," emphasizing the need for mutual respect and equality in negotiations.
However, underlying issues such as technology transfers, market access, and geopolitical rivalries continue to complicate the path to a comprehensive agreement.
Conclusion
The trade relationship between the U.S. and China under President Trump's leadership has been marked by cycles of confrontation and tentative engagement. As both nations navigate the complexities of economic interdependence and strategic competition, the outcomes of their negotiations will have far-reaching implications for global trade and economic stability.
"..... the first step is disruption: tariffs that shatter the existing economic order and drive countries to the negotiating table. Once at the negotiating table, countries will be asked to take steps via currency agreements to lower the value of the dollar. ......... Should allies refuse to bend to the tariffs and decide instead to retaliate with levies of their own, they may find the United States withdrawing from defense agreements such as NATO. .......... Unlike in 1985, large numbers of U.S. dollars today are held by China. Lowering their value would amount to financial warfare with China, which the plan endorses. ...... Much as the Cold War arms race with the Soviet Union squeezed the Communist system to the point of collapse, this strategy seeks to cut off China from the world economy through punishing tariffs, or a user fee on reserves, which would eventually force transformative change. ..........
If everything goes as planned
, U.S. exports would be more competitive globally, China would be weakened and more of our allies would be sharing the burdens of military spending. The upshot would be more manufacturing in the United States and a reinvigorated American heartland. ..........
Will it work? Few economists think so. Many prophesize disaster
........... There is an even bigger problem with the plan, though, than its slim prospect of success. Perhaps the United States could manage in a world that does not run on the dollar. But the dollar is the world’s reserve currency because it is considered the most reliable place to store assets and to invest — a haven from expropriation, political retribution and economic unpredictability. Foreign states and individuals alike invest in the United States because they believe our political system is stable, our legal system is fair and private property is valued. ............ The dollar became strong after World War II when the United States committed to supporting a web of economic and military alliances intended to stave off conflict and ensure peace through trade. The dollar remained strong because, as other nations entering the global trading system fell prey to corruption, cronyism and civil unrest, the U.S. economic and political system stood out as a beacon of security, innovation and enterprise. ............. The most valuable asset of the United States is not the dollar but our trustworthiness — our integrity and our values. If the world envisioned by the Mar-a-Lago Accords comes to pass, it will be a sign that not only our currency but our nation has been devalued. "
Why Did So Many People Delude Themselves About Trump? Donald Trump’s 2024 election sent many finance types into spasms of anticipatory ecstasy as they imagined freedom from regulations, taxes and unfamiliar pronouns. “Bankers and financiers say Trump’s victory has emboldened those who chafed at ‘woke doctrine’ and felt they had to self-censor or change their language to avoid offending younger colleagues, women, minorities or disabled people,” The Financial Times reported a few days before Trump’s inauguration. It quoted one leading banker crowing — anonymously — about finally being able to use slurs like “retard” again. The vibes had shifted; the animal spirits were loose............. “We’re stepping into the most pro-growth, pro-business, pro-American administration I’ve perhaps seen in my adult lifetime,” gushed the hedge fund manager Bill Ackman in December....... The surprising thing isn’t that Berezin saw the Trump tariff crisis coming, but that so many of his peers didn’t. .......... Trump believes, firmly and ardently, in taxing imports, and he thinks any country that sells more goods to America than it buys must be ripping us off. .......... most of the people who make a living off their financial acumen had less understanding of Trump’s priorities than a casual viewer of MSNBC. .......... many investors who pride themselves on their savvy are in fact just creatures of the herd. “All these cognitive biases that amateur retail investors are subject to, the Wall Street pros, are, if anything, even more subject to them because they’ve got career risk associated with bucking the trend” .......... “You don’t get fired for being bullish, but you do get fired for being bearish on Wall Street,” said Berezin. ............ When wokeness was ascendant, plenty of people in tech and finance quietly seethed at being guilt-tripped and forced to feign concern about social justice. “When the opportunity came to jettison all that, they were happy to do it,” said Berezin. “And Trump enabled them to do it.” ............. So last October, when Scott Bessent, soon to become Treasury secretary, said that Trump was really a free trader who used tariffs as a negotiating tactic, Wall Street was eager to believe him. “It’s escalate to de-escalate,” Bessent told The Financial Times. ...........
This claim was obviously absurd. Trump has been obsessed with tariffs, which he called “the most beautiful word in the dictionary,” for decades.
............. When he makes sales, whether of Trump University courses or Trump-branded cryptocurrency, he is usually taking advantage of the buyer, and he views global trade through the same zero-sum lens. .......... during his first term, the so-called adults in the room thwarted some of Trump’s most destructive whims. There have been far fewer such figures in the Trump sequel, resulting in the wholesale degradation of American governance. ............ The conspiracy theorist Laura Loomer just directed a purge of the National Security Council. ....... There’s no one in the executive branch willing to publicly push back on Trump’s threats to take over Canada. Somehow, traders failed to recognize that there would eventually be economic fallout from such profound misrule. ........... Wall Street professionals, like so many other ostensibly smart people, refused to see Trump clearly, mistaking his skill as a demagogue for wisdom as a policymaker. .......
What an odd assumption to make about a man who bankrupted casinos.
................ we might have passed the event horizon, meaning that even if Trump backs off from the tariffs, there’s been enough damage done to the U.S. economy, to the global economy, to investor confidence, consumer confidence, that we’re probably going to see a recession regardless of what happens” ..........
while public attention is focused on the stock market, there are alarming signs in the bond market
............. Usually, if stocks go down, so do yields on U.S. Treasuries, because they become more desirable to people looking for a safe place to park money. At least right now, that’s not happening, which he thinks could signal a crisis of confidence in the stability of the U.S. government and the debt it issues. ............. “Do we really want to use the dollar as a reserve?” It turns out that there’s a price for taking all the soft power America has accrued since World War II and setting it on fire.
For Republicans, Tariffs Pose a Risk Like No Other Trump’s political strength is built on the economy. If it sinks, he could drag his party down with him........ over the last two decades, the post-election period hasn’t offered any clarity at all about the future of American politics. The winning party repeatedly convinces itself it has won a mandate, or even a generational advantage. The shellshocked losers retreat into internal debate. And then just a few months later, it becomes clear that the next phase of American politics will not be what the winners imagined. ........... In one key respect, the elections on Tuesday were not significant: They do not suggest that Democrats solved any of the problems that cost them the last election. Instead, they mostly reflect the party’s advantage among the most highly informed, educated and civically engaged voters. This advantage has allowed Democrats to excel in low-turnout elections throughout the Trump era, even as he made enormous gains among the disaffected and disengaged young, working-class and nonwhite voters who show up only in presidential elections. ............ No party or politician is recession proof. Historically, even truly dominant political parties have suffered enormous political defeats during major economic downturns. .......... In New York Times/Siena College national surveys last fall, more than 40 percent of voters who backed Mr. Trump in 2024 but not 2020 said that the economy or inflation was the most important issue to their vote. ............ Consumer confidence was falling, inflation expectations were rising, and polls found that tariffs themselves were generally unpopular. ............ Already, a half-dozen Republican senators have supported legislation to rein in the president’s authority to impose tariffs. This is nowhere near enough to overcome a presidential veto, but it is an unusual level of Republican opposition to Mr. Trump, and the time for opposition to build is nowhere near over.
Experts say she survived the fall because she was strapped into her seat.
Trump Is Selling Jews a Dangerous Lie Taking a break from her work dismantling her own department, Secretary of Education Linda McMahon last week threatened roughly $9 billion of grants and contracts with Harvard because of “the school’s failure to protect students on campus from antisemitic discrimination.” ............ Jew hatred is real, but today’s anti-antisemitism isn’t a legitimate effort to fight it. It’s a cover for a wide range of agendas that have nothing to do with the welfare of Jewish people. .......... Jews who applaud the administration’s crackdown will soon find that they do so at their peril. ........ Among the first high-profile targets of the anti-antisemitic push have been a recent Columbia graduate and a current Tufts University graduate student, one a lawful permanent resident of this country and the other one here on a student visa, who spoke out in favor of Palestinian rights. Both have been handcuffed, driven off and indefinitely detained. Neither has been charged with a crime. ......... Abductions by government agents; unexplained, indefinite detentions; the targeting of allegedly dangerous ideas; lists of those under government scrutiny; official proclamations full of bluster and bile — Jews have been here before, many times, and it does not end well for us. ............ “A country that has pushed one group out of its political community will eventually push out others.” What our government is doing now is wrong in itself, but beyond that, it poses a bigger threat to Jewish people’s safety than all the campus protests ever could. ................. the forces of anti-antisemitism. ......... But not some of MAGA’s most prominent representatives, including Matt Gaetz and Marjorie Taylor Greene, who had no objection to fighting antisemitism but observed that the language of the bill would interfere with Christians’ ability to accuse Jews of killing Christ. At other times, agreeing with Vladimir Putin, Ms. Greene has said that the Jewish president of Ukraine was running “a Nazi army.” .......... As for Mr. Trump, he declared that Senator Chuck Schumer is “not Jewish anymore” .......... Karl Lueger, a raging antisemite and fin-de-siècle mayor of Vienna, who declared, “I decide who is a Jew.” .......... Leo Terrell, the head of Mr. Trump’s antisemitism task force, shared a tweet by a prominent white supremacist that lauded the president’s “ability to revoke someone’s Jew card.” ........ As Oscar Hammerstein II put it in “The King and I”: “If allies are strong with power to protect me/Might they not protect me out of all I own?” .......... In the Long Island town where I grew up, Jews were a minority. My father taught me how to punch antisemites before getting hit — when I was in elementary school! And he emphasized to me that I should expect to encounter such people wherever I went, especially as I moved into unfamiliar professional or social settings. ............ Like the white supremacists liberated by mainstream anti-D.E.I. language, these antisemites hear perfectly legitimate criticism of, say, the Israeli government and regard it as an opportunity to unfurl the true extent of their prejudice. .............. The president hadn’t been in office a full day before the Anti-Defamation League spoke up to defend Elon Musk for throwing what sure looked to me like a Sieg heil. After weathering intense criticism over its support for Mr. Khalil’s abduction, the organization’s chief executive last week restated the need for due process. How did we get to the point where that’s even in doubt? ......... The Anti-Defamation League was founded in 1913, in the wake of the case of Leo Frank, a Jewish man accused of murdering a 13-year-old Christian girl. Most historians today agree that Frank, who was lynched in 1915, was wrongly convicted after a sham trial, but the MAGA folks on X can’t help but celebrate the lynching of a Jew. “He got exactly what he deserved,” exclaimed Lauren Witzke, a 2020 Republican Senate nominee, “and everyone in that crowd should have received medals for protecting their community.” ..................... “The ‘vibe shift’ is not necessarily that more people on the right are antisemites compared to eight years ago, but that much of the right now appears to reject the basic notion that there should be any stigma against even the vilest bigotry.” ............. In the second and first century B.C., the Jewish kingdom of Judea aligned itself with Rome to protect itself from the domination of Greek culture. Rome obliged and conquered Judea for itself. The enemy of our enemy was not our friend.
Trump Has Everything Under Control .... and an America that has dethroned itself from global economic leadership. And don’t be surprised if it leads to war, as global economic upheavals often do. ....... Like millions of other Americans, I barely noticed losing a big chunk of my net worth. Can’t wait for all the price increases to kick in.
Donald Trump has long argued that global trade rules are unfair to the U.S. because he believes they disadvantage American industries, favor foreign competitors, and lead to trade deficits. His perspective is rooted in a mercantilist view of trade, where a trade deficit is seen as a sign of economic weakness. He has criticized institutions like the World Trade Organization (WTO) for not doing enough to prevent what he sees as unfair practices by countries like China. His approach to trade policy emphasizes bilateral deals and the use of tariffs as leverage to renegotiate trade terms in favor of the U.S.
Economic Theories That Disagree with Trump's Tariff Policy
Several mainstream economic theories challenge Trump’s view and the use of widespread tariffs:
Comparative Advantage (David Ricardo)
This principle suggests that countries should specialize in producing goods they make most efficiently and trade for the rest. Tariffs distort this natural allocation of resources, making economies less efficient.
Free Trade Theory (Adam Smith)
Smith argued that free markets and open trade increase wealth for all nations. Tariffs create inefficiencies, raise prices for consumers, and reduce economic growth.
New Trade Theory (Paul Krugman)
This theory acknowledges that while some government intervention can be useful in developing industries, broad-based tariffs harm competitive industries, restrict innovation, and trigger retaliation.
Global Supply Chain Economics
Modern trade involves complex global supply chains. Imposing tariffs raises costs for American companies that rely on foreign components, making U.S. goods more expensive both domestically and internationally.
Potential Consequences of Imposing Tariffs
If Trump were to impose widespread tariffs, several outcomes could follow:
Retaliation from Other Countries
Nations affected by U.S. tariffs would likely impose their own tariffs on American exports, making U.S. goods less competitive abroad.
Higher Prices for American Consumers
Tariffs act as a tax on imports, raising the cost of consumer goods. Everyday items, from electronics to cars, would become more expensive.
Disruptions in Supply Chains
U.S. manufacturers rely on global supply chains. Tariffs would increase production costs, making U.S. industries less competitive.
Job Losses in Export-Dependent Industries
While tariffs might protect some domestic jobs in protected industries, they would hurt export-dependent sectors like agriculture, tech, and manufacturing.
Financial Market Volatility
A trade war could lead to market uncertainty, discouraging investment and potentially triggering a downturn.
Global Reactions and Economic Impact
China and the European Union (EU):
Countries like China, the EU, and Canada would likely impose reciprocal tariffs, targeting key U.S. industries such as agriculture, energy, and aircraft manufacturing.
Shift in Global Trade Alliances:
U.S. allies may strengthen trade agreements with each other, further isolating America. This could accelerate the rise of China-led economic groups like the Regional Comprehensive Economic Partnership (RCEP).
Global Slowdown:
If tariffs disrupt international trade, global GDP growth could slow, leading to reduced investment, falling stock markets, and lower consumer spending worldwide.
Dollar Strength and Export Decline:
If tariffs drive uncertainty, investors might flock to U.S. assets, strengthening the dollar, making U.S. exports even more expensive and less competitive.
Conclusion
Trump’s tariff-heavy approach stems from a belief that trade deficits are a problem and that tariffs can coerce countries into better deals. However, most economists argue that tariffs ultimately harm both the U.S. and global economies by raising costs, disrupting supply chains, and provoking retaliatory measures. If implemented aggressively, Trump’s policies could trigger a trade war, cause economic slowdowns, and weaken U.S. influence in global trade governance.
