Planet Money: The U.S.-China Trade War, According to Game Theory

Episode Release Date: May 30, 2025
Host: Keith Romer and Amanda Aronczyk

Introduction

In this episode of Planet Money, hosts Keith Romer and Amanda Aronczyk delve into the complexities of the U.S.-China trade war through the lens of game theory. With escalating tariffs and heated rhetoric from both nations, understanding the strategic interactions between the U.S. and China is crucial. Trade economist Emily Blanchard provides expert insights, unpacking the strategic games at play and their implications for the global economy.

Backdrop of the Trade War

Keith Romer sets the stage by highlighting the unpredictable nature of the recent U.S.-China trade relations:

"Over the last few months, U.S.-China trade relations have been kind of bizarre. Like, it is unclear what these two countries are even trying to accomplish."
[00:21]

The trade tensions intensified with President Donald Trump's tariff announcements starting on April 2nd, leading to a tit-for-tat escalation:

• U.S. Tariffs: Imposed tariffs of at least 14.5% on Chinese imports.
• China's Retaliation: Responded with 12.5% tariffs on U.S. goods.

Amanda Aronczyk emphasizes the escalation and rhetoric from both sides, quoting Trump:

"Our country and its taxpayers have been ripped off for more than 50 years. But it is not going to happen anymore. It's not going to happen."
[00:47]

China's counter-narrative portrayed the U.S. as a global bully, unwilling to compromise:

"History has proven compromise won't earn you mercy, and kneeling only invites more bullying. No one was going to back down."
[01:11]

After months of escalating tariffs, a temporary truce was reached earlier in the month, reducing tariffs to 30% on Chinese goods and 10% on American goods. However, recent court rulings have deemed many of the new U.S. tariffs illegal, with the White House appealing these decisions.

Game Theory as a Framework

To dissect the trade war's strategic maneuvers, the hosts consult Emily Blanchard, a trade economist with deep experience in U.S.-China relations. Emily advocates for using game theory to interpret the actions and strategies of both countries.

"Game theory can show you how strategies bend and shift. When I think that you think that I'll do one thing, and you think that I think that you'll do this other thing."
[03:00]

Blanchard emphasizes the importance of identifying the correct "game" being played to determine optimal strategies:

"If you're playing the optimal strategy to the game that you're not in, the odds that you really have the optimal strategy are very, very low."
[08:31]

Potential Games in the Trade War

The episode explores four primary game theory models to explain U.S.-China interactions:

1. Ultimatum Game

Illustrated through a live demonstration, the Ultimatum Game involves one player proposing a division of resources and the other accepting or rejecting it. Edging into this concept:

• Keith Romer offers Amanda $1 out of $100, which she accepts to avoid leaving empty-handed.

  "I'll take the dollar. I didn't have a dollar five seconds ago. Now I'm gonna have a dollar. I'll take it."
  [07:22]

This highlights the optimal strategy in such a game, where the responder accepts any positive offer to maximize their gain, despite perceived fairness.

Emily Blanchard suggests that the U.S., particularly under Trump's administration, may have approached the trade war as an Ultimatum Game:

"It kind of suggests to me that he thinks maybe this is a take it or leave it game."
[06:00]

However, this perspective is challenged as the trade war escalated beyond simple ultimatums, with both nations raising tariffs in response to each other's moves.

2. Game of Chicken

China expert Yun Sun introduces the Game of Chicken, where two players head towards each other, and the first to swerve loses:

"That is a metaphor. And that's what we basically saw for the first half of April..."
[11:14]

This model aptly describes the initial stages of the trade war, with both nations unwilling to concede, escalating tariffs repeatedly.

However, Yun Sun points out limitations:

"But looking at the long run, I think this is not just a game of chicken, because game of chicken by default is a temporary or a short ephemeral stage."
[12:38]

3. War of Attrition

Transitioning from Chicken, the War of Attrition involves prolonged conflict where each side depletes resources over time:

"In a war of attrition, importantly, there are a lot of turns, time passes. The risk isn't so much one big smash up as it is slowly bleeding away all of your resources."
[12:54]

Blanchard discusses how both the U.S. and China evaluate the value of winning against the cost of sustaining the conflict.

Yun Sun elaborates on China's preparedness:

"The Chinese government very intentionally rebuilt supply chains for goods that Chinese consumers rely on so that the country would be less vulnerable to trade restrictions."
[14:32]

This strategic resilience allows China to withstand longer periods of economic strain, challenging the U.S.'s expectations of a swift victory.

4. Prisoner's Dilemma

The Prisoner's Dilemma presents a scenario where two players may choose to cooperate or betray, with the potential for mutual benefit or mutual harm:

Live Demonstration:
Keith and Amanda simulate the Prisoner's Dilemma, highlighting the tension between cooperation and self-interest.

"The classic prisoner's dilemma. It's pure strategy. It's, nobody cooperates with each other. Everybody steps on everybody else's toes."
[22:26]

Blanchard connects this to the trade war, suggesting that fostering cooperation could lead to mutually beneficial outcomes, contrasting with the zero-sum nature of the other games discussed.

Analyzing the U.S.-China Strategies

Political Implications:
Yun Sun notes the strategic posturing of leaders, emphasizing the need for both Trump and Xi Jinping to maintain strong leadership images domestically:

"The first one to blink or to appear soft is going to lose a lot of the leadership credibility that they prioritize."
[12:22]

Economic resilience:
China's proactive measures, such as diversifying supply chains and moving production to intermediate countries, enhance its ability to endure the trade war.

"Chinese companies have gotten way more savvy at getting around US Tariffs by moving some of their production to intermediate countries like Vietnam or Mexico."
[14:36]

Political Systems:
Yun Sun argues that China's authoritarian system provides greater resilience compared to the U.S.'s democratic framework, where public opinion can swiftly pressure government actions.

"I feel that if U.S. is engaged in a competition with China in terms of domestic resilience, I think China is always going to have an advantage because it is an authoritarian state."
[15:57]

Current Status:
The recent 90-day pause on tariffs is viewed as a temporary ceasefire, with expectations of continued negotiations and potential escalations in other economic sectors.

"Yun sees this 90-day pause as something like a temporary ceasefire. She doesn't think either side wants to pull out the 100 plus percent tariffs again."
[17:57]

The Metagame: Beyond Tariffs

Blanchard introduces the concept of a metagame, suggesting that tariffs are just one aspect of a larger strategic competition between the U.S. and China, encompassing geopolitical and economic dimensions.

"The tariff game is just one tiny piece of this much, much larger metagame between the U.S. and China."
[26:59]

This complexity implies that straightforward game theory models may only partially capture the strategic interactions at play.

Conclusion: The Complexity of Strategic Interactions

The U.S.-China trade war exemplifies the intricate applications of game theory in international relations. While models like the Ultimatum Game, Game of Chicken, War of Attrition, and Prisoner's Dilemma provide valuable frameworks, the reality is a multifaceted metagame with interwoven economic and geopolitical strategies. Understanding these dynamics is essential for predicting potential outcomes and formulating effective policies.

As the episode closes, hosts highlight additional resources for listeners interested in exploring the trade war's impact on small businesses, farmers, and the legalities of "Made in China" labels.

Notable Quotes

• Donald Trump:

  "Our country and its taxpayers have been ripped off for more than 50 years. But it is not going to happen anymore. It's not going to happen."
  [00:47]

• Emily Blanchard on Ultimatum Game:

  "Crucially, it's assigned itself the role of proposer. We have all the power. You have none."
  [10:14]

• Yun Sun on China's Resilience:

  "I think China is always going to have an advantage because it is an authoritarian state."
  [15:57]

Production Credits

• Produced by: Sam Yellow Horse Kessler
• Assisted by: Sylvie Douglas
• Edited by: Jess Jiang
• Fact-checked by: Sierra Juarez
• Engineered by: Kwesi Lee (with assistance from Robert Rodriguez and Sina Lofredo)
• Executive Producer: Alex Goldmark

Hosted by Amanda Aronczyk and Keith Romer

For more insights into the U.S.-China trade war and its broader implications, explore our related episodes linked in the show notes.