US-China trade war revised

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The US-China Trade War
Engaging in an altercation with a trading partner seems like a poor choice. However, it is not entirely illogical. It might be a good way for measuring a partner’s weaknesses to achieve a better trade payoff. Enacting tariffs enables one partner to learn about the other, especially regarding its willingness to reciprocate. The US, in starting its trade war with China, is relying on previous experiences that proved successful, such as issuing threats of tariff imposition on South Korean steel and aluminum imports, leading to South Korea offering concessions to avoid the tariffs. The current US-China trade war has led to the implementation of $34 billion, with $16 billion more, ready to be imposed, by each of the two countries. China has threatened to impose tariffs on a total of $60 billion of US imports, while the US has threatened to impose tariffs on $200 billion’ worth of Chinese imports (Mayeda n.pg).
From the perspective of “prisoners’ dilemma”, if the two countries continue engaging in defective strategies, as they are doing currently, then both of them might end up in a bad “Nash equilibrium”, meaning, the outcomes for both of them will be much worse than if they choose to cooperate with each other. It has been projected that, should the two countries continue choosing strategies that serve to protect their best interests during uncertainty, the global output will probably decrease by one to three per cent in the next few years.

Currently, both are adopting protection of self-interest. Assuming both countries decide to impose an increase of 10 per cent on current tariffs, then the volumes traded globally will decrease by approximately 6 per cent, and GDP by 1.4 percent. The US, China, and Europe will suffer a 1.7 to 2.2 percent decrease in output (Mayeda n.pg).
From the “tit for tat” perspective, with each new tariff being imposed by the US, China imposes a similar tariff. It is expected that unless these two countries reach a consensus, the US tariff rate will increase to 25 percent by January 2019 (Mayeda n.pg). From this perspective, both countries face a choice of whether to cooperate or defect whenever the other imposes a tariff. Miscalculation is the biggest hurdle with tit for tat. With each country raising its tariffs expecting the other to back down, the result will be inflated tariffs leading to reduced output leaving both countries in a worse position.
Under the grim trigger strategy, both countries will cooperate, until one of the defects. After that, the other country will defect in perpetuity, until the end of the iterated game. As it stands, the two countries are not cooperating at the moment. Therefore, this game does not currently apply to them. However, if the two countries were to cooperate and one of them chooses to defect, it will result in an endless prisoners’ dilemma leading to the probable demise of both economies.
From their current position, both countries have an advantage over the other, but this will not last long, especially for China, which has already started feeling the effects of the tariffs. US farmers have also started feeling some effects, considering that China is one of their biggest importers of food and supplier of agricultural products. Judging by the increasingly negative impact the trade war has on China at the moment, it is more likely to take the first step back and push for negotiations.
Work Cited
Mayeda, Andrew. “Tit-For-Tat Becomes the Norm as U.S., China Dig in For Trade War”.
Bloomberg.Com, 2018, https://www.bloomberg.com/news/articles/2018-08-03/tit-for-tat-becomes-the-norm-as-u-s-china-dig-in-for-trade-war. Accessed 8 Dec 2018.