Trump is no game theorist

By Koichi Hamada

While humans depend on cooperation to survive and thrive, our best, most innovative work often arises from competition. Striking the right balance between cooperation and competition is not always easy, but when it comes to the global economy, it is not as complicated as one might assume, thanks not least to important insights from game theory. US President Donald Trump would benefit his country and the world by acquainting himself with them.

The Nobel laureate John Nash, building on the work of mathematician John von Neumann and the economist Oskar Morgenstern, laid the mathematical foundations for modern-day game theory by analyzing cooperative and non-cooperative interactions among rational agents. Among large numbers of economic actors, free and fair competition leads to optimal (or nearly optimal) outcomes. But when such competition is disrupted, such as by monopoly power or government intervention, outcomes worsen.

Trump’s tariff policy illustrates this point. Suppose that the United States is playing a game with a major rival like China. For simplicity, we will assume that each can choose between two policy moves: high tariffs or low tariffs. If the US and China choose low tariffs, bilateral trade is strengthened, supporting both economies’ growth. As a result, the US and China enjoy a reasonably strong and relatively equal payoff.

But if the US decides that it is not satisfied with this payoff – as Trump has done – it raises tariffs on China. The idea is that high US tariffs on Chinese imports, combined with low Chinese tariffs on US imports, would enable the US to reap a larger payoff, while reducing China’s payoff.

There is, however, an obvious flaw in this strategy: China now has little reason to keep its tariffs on the US low. Once China raises tariffs, the two economies can again expect the same payoff, but it is now smaller than when tariffs were low, because high tariffs impede the kinds of trade dynamics that fuel growth.

The parties find themselves in a situation reminiscent of the “prisoner’s dilemma,” a classic game in which two accused detainees, being held separately, could face moderate punishment if neither discloses any information to the authorities. But one might secure a lesser punishment (or none at all) by informing on the other. There is just one hitch: this works only if the other remains silent. If both offer the authorities information, they end up worse off than they would have been if they had kept their mouths shut.

So, choosing betrayal offers a chance to reap major benefits, but also raises the risk of a worse outcome for everyone. Likewise, staying silent can allow both “prisoners” to benefit, but leaves one vulnerable to becoming the biggest loser. The difference with tariffs, of course, is that countries can change their decisions after the fact: China can initially choose cooperation then join the US in raising tariffs, and the US can choose competition, only to return to cooperation.

Moreover, countries can apply a wide range of pressure strategies, from limiting certain critical exports, such as rare-earth elements (China) or semiconductor technologies (the US), to military action. When the US plays the same game with close allies, such as Japan and the European Union, it can also threaten to withdraw the security guarantees on which they depend, thereby discouraging them from retaliating when the US raises tariffs – though their tolerance may have its limits.

Game theorists argue that repeating the prisoner’s dilemma eventually leads to better outcomes, as the more impatient country might give up on the high-risk strategy. This is particularly effective when the less patient party is also the more uncooperative one, as might be the case with the US under Trump. But Trump should know by now that China will respond to tariff hikes in kind.

In any case, repeating the tariff game carries high costs. Tariffs effectively insert a horizontal wedge between the demand curve and the supply curve on the standard supply-demand graph, disrupting efficient resource allocation, and the damage cannot be offset through monetary measures. Furthermore, reversing tariffs does not necessarily restore the pre-tariff equilibrium, especially if they have been in place for a prolonged period. This is the case for Trump’s tariffs, which have already fundamentally damaged the global economy. At this point, interest-rate cuts by the US Federal Reserve would be akin to cosmetic surgery.

That is why national and international legal frameworks aim to prevent prisoner’s dilemmas from arising in the first place. The World Trade Organization was created precisely to support cooperation, with the WTO Charter dictating that tariffs must be regulated and nondiscriminatory. But the US has kept the WTO’s dispute-settlement mechanism paralyzed since 2019, by blocking appointments of new judges to fill vacancies on the Appellate Body. More recently, it has taken aim at the “most favored nation” principle, which promotes equal treatment among trading partners.

Harry Gordon Johnson of the London School of Economics once observed in a seminar that I often view international economic relations like a game of chess: “If the knight moves like this in one country, then the queen moves like that in the other.” He was right, though this framework assumes that, however well or badly the game is played, everyone plays according to the same rules. Today, the danger of checkmate – or, more likely, stalemate – remains very real. But so is the risk that the US will overturn the board.

Koichi Hamada, Professor Emeritus at Yale University, was a special adviser to former Japanese Prime Minister Abe Shinz?.

Copyright: Project Syndicate, 2026.
www.project-syndicate.org

 

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