Tuesday, November 15, 2016

China plays optimally in a repeated prisoners' dilemma

We have blogged before about how trade policy can resemble a repeated prisoners' dilemma. Now it looks as if China looks as if it is playing optimally:
If Trump acts on his threats to impose a 45% tariff on Chinese imports and officially list China as a currency manipulator, China will take a "tit-for-tat approach," the newspaper, Global Times, said. 
The airline industry was singled out in the list of countermeasures — specifically that China would replace a batch of orders for US-owned Boeing airplanes with French-owned Airbus ones. 
It also said US soybean and maize imports would be halted and China could limit the number of Chinese students studying in the US.


  1. Froeb,
    The topic of the prisoners’ dilemma is an interesting one to discuss further. Imposing 45% tariff on new imports from China or any other international trading partners could certainly impact the way in which we do business with external entities, however, to me that is just a game tactic that Trump used during his presidential election campaign. The fact of the matter is that if we were to go this route, China has so many ways to play the cat and mouse game that would certainly hurt us in the long run, perhaps Mr. Trump would reevaluate this view in their regard once he takes on the white house.
    In the one hand, we have a huge Debt to china due to the number of product we import from them. In the other hand, deciding to impose a 45% tariff on imports would let no choice to companies to start producing more good domestically, this would have a domino effect in increase prices for goods not only because the manufacturing process would be higher but the raw materials will be equally expensive by acquiring them domestically. The approach of imposing this significant increase in tariff can potentially send the economy to a new recession since companies could reduce their workforce to remain competitive and profitable over the long term. In the other hand, an increase in tariff could encourage domestic job growth in exchange for higher pricing in goods that we use frequently. The notion of higher tariff remains to be seem by the new president elect, we will see what transpires in the next four years.

  2. Starting a trade war with China is certainly a terrible idea and “only a fool would stay stuck in a bad equilibrium” (Froeb et al, 2016). Unfortunately with our new President I think we may be in trouble. In an article on CNN Money they give eight reasons why this is a bad idea but the main was is that China can and will fight back. If Trump reads Managerial Economics: A Problem Solving Approach, he could learn that the way to get out of a repeating Prisoner’s dilemma is: be nice – cooperate and do NOT strike first, be easily provoked – respond to threats immediately, be forgiving, don’t be envious – put your focus where it should be, and be clear – make sure your words and actions are clear (Froeb et al, 2016). Unfortunately for us China’s tit for tat strategy certainly puts them in a better position, they can and will use this strategy very effectively against the US.

    Froeb, L., McCann, B., Shor, M., & Ward, M. (2016). Managerial Economics: A Problem Solving Approach. 4th ed. Boston, MA: Cengage Learning.

    Riley, C. (2016). 8 reasons why starting a price war with China is a bad idea. CNN Money. Web. Retrieved from: http://money.cnn.com/2016/11/16/news/economy/us-china-trade-war-donald-trump/

  3. Module 3 – Blog 1 – China Plays Optimally in a Repeated Prisoners’ Dilemma

    A trade war with China is not the way forward for the U.S and may very well end up being a prisoners’ dilemma. If Trump goes ahead with his threat of imposing a 45% tariff on Chinese imports and forcing China to take a tit-for-tat approach, then the U.S. would lose in the long run. According to (Porter, 2016), China would suffer as a result of the 45% tariff; however, China is better placed than the U.S. to take the blow. The tremendous growth of China-U.S. economic and trade cooperation has been a solid foundation for their bilateral relationship.

    As noted by (Froeb, 2016), the tit-for-tat strategy exhibits all of the characteristics of a successful strategy and does not strike first. It is also focused on maximizing your own profit, and not on limiting your competitor’s profits. China has several ways to retaliate against the U.S., which may end up giving some of the United State’s most successful companies a rough ride. For example, the manufacturing of the Apple iPhone may be seriously disrupted (Porter, 2016).

    To avoid a prisoners’ dilemma, the U.S. and China need to move towards cooperation and avoid friction. Advancing the cooperation agenda is the best strategy for both countries to manage the China-U.S. relationship since when both countries act together and strengthen cooperation, they can do bigger things for the benefit of the world (Wu, 2016).

    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial Economics. A Problem Solving Approach. 4th Ed. Cengage Learning.

    Porter, Eduardo (2016). The New York Times. A Trade War Against Chin Might Be a Fight Trump Couldn’t Win. Retrieved from http://www.nytimes.com/2016/11/22/business/a-trade-war-against-china-might-be-a-fight-trump-couldnt-win.html?_r=0

    Wu, Jlanmin (2016) The World Post. A Partnership of the Huffington Post and Berggruen Institute. Here’s What’s on the Table for the China-U.S. Relationship this Year. Retrieved from http://www.huffingtonpost.com/wu-jianmin/china-us-relationship-2016_b_9568060.html

  4. The prisoner’s dilemma is an interesting strategic model that highlights how important it is to know what the impact of any strategic move made on either side of the table will result in. By choosing to move forward with a 45% tariff on China and other importing nations, the dilemma would be whether the economic impact on the US is greater than the increased benefit of imposing the tariff. If the goal of the tariff is to increase manufacturing and production within the US, than perhaps a better way to approach this isn’t with a tariff. The economic impact of creating this scenario could prove dangerous. The focus should be on finding a way to change the game. By changing the game, Trump could create conditions that would make it favorable for companies to support the US economy without the negative impact to the economy, the labor force or national relationships. If the attention is placed on the tariff first, the impact would be negative with increased costs, which always impact revenue, sales and ultimately employment of personnel. By focusing on the American economy, structuring that to support the environment you wish to establish, establish that, and then create the tariff. By approaching it backwards, you give China and others the ability to negatively impact the entire economy within the US.

    Froeb, L. M., McCann, B. T., Shor, M., & Ward, M. R. (2016). Managerial Economics. A Problem Solving Approach. 4th Ed. Cengage Learning.